An exploding federal debt and continued growth of tax complexity have forced tax reform into the limelight once again. In December 2010, a deficit reduction commission offered a variety of models for both simplifying the tax code and increasing the amount of revenue it generates. In 2011, a so-called "Super Committee" failed in its mission to craft a deficit reduction package, in part because Republicans refused to consider new revenues and in part because Democrats put forth no significant entitlement reform proposals. The stalemate continued through 2012.
The enactment of the American Taxpayer Relief Act of 2013 on Jan. 2, 2013 further hardened partisan positions, with most Democrats (including President Obama) insisting that tax reform should produce more revenue from higher-income taxpayers, and most Republicans insisting that all additional revenue from broadening the tax base in tax reform must be used to lower tax rates. The combined effects of the large and growing budget deficit, the need to increase the US credit limit (aka the debt ceiling), and the fragile economy have lined up to force a major political debate about the relative mix of spending and revenue.
Throughout 2011 and 2012, and continuing into 2013, Congress’ tax-writing committees (Senate Finance Committee and House Ways and Means Committee) have held hearings about broad issues that must be considered as part of tax reform.
In early 2013, the Ways and Means Committee established bipartisan “working groups” to examine various areas of the tax law to better understand the current rules and various existing proposals for reform. One of these working groups focused on real estate taxation. The Finance Committee in the spring of 2013 also embarked on similar studies of the current tax law and various proposals for reform, but kept its meetings private and did not solicit stakeholder input, as did the Ways and Means Committee.
In late November 2013, Senator Baucus, Chairman of the Finance Committee, released a series of staff discussion drafts on tax reform. Each draft covered a different topic of tax reform, and topics included international tax, tax administration, energy tax, and cost recovery and tax accounting. These drafts include some specific proposals to repeal certain tax benefits now available under the current tax code. Important to commercial and rental real estate are proposals to increase the depreciable lives of real property used in business or held for investment to 43 years (from the current periods of 39, 27.5, and 15 years), to raise the tax rate on gain from depreciation recapture from the current 25% to the ordinary income tax rate (now as high as 39.6%), and to repeal the tax rules that allow taxpayers to exchange like-kind real estate on a tax-deferred basis.
In February 2014, House Ways & Means Chairman David Camp released a comprehensive draft tax reform plan that includes many of the same provisions as the Baucus plan that are negative to commercial real estate, as well as some different ones that would be devastating to residential real estate.
The threat of tax reform over the remainder of 2014 seems to have subsided. Due to GOP term limits on committee chairmen, Camp is stepping down as head of the Ways and Means Committee at the end of 2014. Additionally, Senator Baucus resigned his post and became Ambassador to China in February 2014. However, tax reform remains a significant possibility in 2015 and beyond.