By Matthew Berger, VP of Tax, Student Housing
Matthew M. Berger is Vice President of Tax and Vice President of Student Housing. In his tax role, Matthew represents the interests of the multifamily industry before Congress and federal agencies on tax issues.
Last week, the House and Senate took the first steps toward enacting Republican fiscal policy priorities by moving budget resolutions through the House and Senate Budget Committees. Congress must approve a budget resolution to unlock the reconciliation process that enables the Senate to pass legislation with just 51 votes as opposed to the 60 votes normally required.
House Budget Resolution: The House Budget Committee on February 13 passed its budget resolution that calls for $4.5 trillion in net tax cuts. The House Ways and Means Committee, however, would only be able to pass $4.5 trillion in tax cuts if other committees can cobble together $2 trillion in spending cuts. Any number that falls short of $2 trillion reduces the $4.5 trillion in net tax cuts that the Ways and Means Committee can pass. Notably, the Ways and Means Committee can also pass tax increases and/or spending cuts within its jurisdiction to offset revenue reductions. Finally, the House’s budget resolution includes a reconciliation instruction to increase the debt limit by $4 trillion. This ceiling will have to be raised at some point during the summer.
The House is in recess this week but could attempt to process the budget resolution when it returns.
Senate Budget Resolution: The Senate Budget Committee on February 12 passed its own budget resolution focused on national security, immigration and energy policy. The Senate Budget Committee’s resolution would leave Tax Cuts and Jobs Act (TCJA) tax policy to a second reconciliation bill later this year.
The Senate is prosessing its budget resolution this week.
Implications for Tax Policy: The House and Senate resolutions continue the debate over whether Congress should focus on a single national security, immigration and energy bill before addressing a tax bill later in the year or try and enact one larger, comprehensive piece of legislation. This debate will be resolved as the chambers process their budget resolutions, but an agreement on an identical resolution will have to be reached to move forward with reconciliation legislation. It is uncertain how long the debate will take to resolve, and it is notable that President Trump on February 19 weighed in with a preference for the House’s approach. Finally, Congress will also continue to be busy with fiscal policy apart from the budget resolution, as it still has to address FY25 appropriations by March 14.
Additionally, making permanent the TCJA would cost approximately $4.6 trillion, which will put a focus on offsets. The House resolution targets $4.5 trillion in tax cuts (assuming $2 trillion in spending cuts), but that cost does not include any policy changes, such as modifications to the $10,000 limitation on state and local taxes paid by individuals, President Trump’s proposals (e.g., taxes on overtime pay and tips), or enacting housing affordability tax incentives. Should Congress move forward with the House’s budget plan, it is unclear if Congress could find $2 trillion in offsets that could pass outside of the Ways and Means Committee’s jurisdiction, never mind additional offsets. The hunt for offsets has also led to talk about carried interest and curtailing state and local income tax deductions paid by multifamily members (see more below).
NMHC Tax Policy Priorities: We continue to focus on our key priorities and three-pronged strategy for tax legislation. Our strategy calls for:
- Making permanent reduced individual income tax rates, Section 199A (20-percent business income tax deduction), and the doubled estate tax exclusion enacted in TCJA.
- Supporting housing affordability tax incentives, including expanding the Low-Income Housing Tax Credit, enacting a Workforce Housing Tax Credit, reinvigorating opportunity zones and spurring the conversion of underutilized commercial property into apartments.
- Opposing onerous revenue raisers, including those targeting carried interest and the deductibility of state and local taxes (e.g., income, property and industry-related taxes) paid by pass-through entities and REITs.
Recent Actions on Our Priorities
Section 199A: Making permanent Section 199A is clearly a key priority for Congressional Republicans. On January 23, Rep. Smucker and Sen. Daines introduced permanency legislation with the bills now having 172 House cosponsors and 42 Senate cosponsors. NMHC signed the following trade association letter on the bill.
Estate Tax: Republicans also widely support estate tax relief, and on February 13, Rep. Feenstra and Sen. Thune introduced repeal legislation that has 175 House cosponsors and 45 Senate cosponsors. NMHC signed letters to the House and Senate supporting that bill. While estate tax repeal goes further than making permanent the doubled exclusion amount, such a policy would likely be substantially more costly.
Carried Interest: As there is a focus on revenues, President Trump on February 6 called for taxing carried interest at ordinary income tax rates as opposed to capital gains rates. NMHC continues to make the case to Congress that a higher tax rate on carried interest will discourage real estate partnerships from investing in new construction at a time when demand for apartments continues to grow and chronic underbuilding has limited new housing supply.
State and Local Income Tax Deductibility: TCJA limited an individual taxpayer’s state and local tax (SALT) deduction to $10,000. To benefit pass-through businesses, including those in the multifamily industry, 36 states have enacted work arounds that allow state taxes to be paid at the entity level. This allows individuals owning these pass-through businesses to fully deduct SALT taxes attributable to those enterprises. C corporations have no limitations and can fully deduct their taxes. Finally, under current law, property taxes are fully deductible by all business entities.
As Congress looks to raise revenue, one issue that has come up is potentially denying or limiting the deductibility of state income taxes attributable to business. For example, Congress could impose a SALT limit on C corps, as well as shutdown the 36 state workarounds. Congress could also go further and deny property tax deductions. Both options would represent a tax increase on multifamily members with the second being especially pernicious, and NMHC is supporting retaining current law.