8/27/2018. Building for the Future. Near Term Challenges

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1 Building for the Future FEA 2018 Annual Conference David E. Franasiak, Williams & Jensen A View from the Hill September 12 14, 2018 Marriott Country Club Plaza Kansas City, Missouri Tax Reform 2.0: Ways and Means Chairman Kevin Brady and the House and Republican Leadership continue to push for a Tax Reform 2.0 vote before the 2018 midterm elections President Trump has indicated he would support a second tax bill The exact contours of the legislation and the exact timetable are unclear Tax Reform 2.0 Outlook: Would primarily be a political effort ahead of the midterm elections designed to force Democrats into a difficult vote House: One option is for the House to hold a vote before the midyear elections Senate: Unlikely that the Senate would follow the House in holding a similar vote The bill would not have the advantage of moving under budget reconciliation procedures allowing for passage with a simple majority The bill would likely fall short of the requisite 60 votes, while still allowing vulnerable senators up for election the ability to vote in favor not an ideal outcome for Senate Republicans We currently believe that the bill is largely political theater, but there remains the possibility that Chairman Brady would release a more complete second tax bill with meaningful reforms. 1

2 Tax Reform 2.0 Framework The two page framework from the House Ways & Means Committee on July 24 th included the following details on Tax Reform 2.0: Make permanent the income tax rate and deduction changes scheduled to expire in 2025 Streamline retirement savings accounts: Currently, the tax treatment of retirement savings has many restrictions, limitations, and rules that differ for various retirement vehicles (IRA, Pension, 401k). Though the framework does not specify how lawmakers would reform the current structure of retirement savings, the creation of a universal savings account may be a significant improvement over today s long term savings options, especially for Americans who may not have access to retirement savings through their employer. Improve the tax treatment of start up businesses: While it s unclear what provisions the House may consider, lawmakers could make the Section 179 deduction more generous or create a standard deduction for start up business costs, among other options. Tax Extenders: It is likely that Congress will try to pass legislation extending a package expired tax provisions known as extenders, possibly making some permanent, in addition to making fixes (not true technical corrections) to the TCJA Would likely be combined with other must pass legislation such as continuing resolution needed to fund government agencies Several dozen temporary tax breaks that expired at the end of 2016 were extended for the 2017 tax year Following the TCJA, they face another decision of whether to extend them temporarily, permanently or to let some or all of them expire The Ways and Means Committee has started the process to decide which tax cuts should be continued Technical Corrections: It is important to differentiate a tax fix or correction versus what is defined as a technical correction A fix must have revenue offsets, while a real technical correction does not There are a number of inconsistencies, errors and unfavorable policies that were included in the TCJA Many international tax provisions will require legislative fixes In contrast, technical corrections are where the member s intent in passing the legislation was clear and there was a drafting error effectuating the legislation. (For example the inability to depreciate 15 year property is a technical correction due to a drafting error) The Joint Committee on Taxation (JCT) has been preparing a set of technical corrections to the tax reform bill and hope to have it in legislative form by the end of this year For both permanent extenders and TCJA fixes, lawmakers will need offsets for the lost revenue 2

3 Capital Gains Indexing: We are monitoring developments on capital gains indexing closely Lawrence Larry Kudlow, President Trump s newly appointed Director of the National Economic Council, is in support of the idea, as is Senator Cruz (R TX) S.2688, Capital Gains Inflation Relief Act of 2018: would provide for the indexing of certain assets for the purposes of determining gain or loss. Treasury Regulations: The TJCA Tax Cuts added new code section 199A, which provides a 20 percent deduction for qualifying income of non corporate or pass through business Designed to give these businesses a tax relief similar to the corporate rate cut The TCJA instructed Treasury to prescribe rules for determining the unadjusted basis immediately after acquisition of qualified property acquired in like kind exchanges or involuntary conversions. We are concerned that Treasury could finalize a regulation that reduces the unadjusted basis for like kind exchanged acquired property, thereby potentially impacting the overall demand for 1031 LKE transactions FEA and 15 other groups signed a comment letter and met with Treasury on June 13 th. There was a follow up comment letter and meeting on August 28 th. May impact the ability of a QI to qualify to have the 20% pass through deduction under Section 199A 2018 FEA Washington Efforts and Activities Coalition Partners: We are continuing to work with our coalition partners. We lead a coalition of 15 associations on our regulatory submission on the Section 199A, 1031, unadjusted basis issue. We are working with our real estate partners, including: the Real Estate Roundtable, Realtors, Commercial Real Estate Development Association, Asian American Hotel Owners Association, International Council of Shopping Centers Americans for Tax Reform (AFTR) continues to help us in maintaining Section 1031 LKE, where appropriate, with messaging around our regulatory efforts on Section 199A. We continue to keep in touch with the Farm Bureau, agricultural interests, the real estate associations and end user groups regarding pending legislation and regulatory activities Washington Efforts: We are maintaining the FEA presence in Washington and are prepared to ramp up efforts should Section 1031 become threatened once again We had a fly in with 35 meetings in May 2018 and have another planned for October 2 nd and October 3 rd We had two Treasury meetings on Section 1031/199A this summer and a meeting with Rep. Nunes staff regarding expensing of buildings We continue to be active with the FEA 1031 PAC to maintain presence 3

4 Current trends (as of August 2018) are not running in favor of the House and Senate Republicans It is likely that the House Republicans could lose their majority. If it becomes a wave election, the Senate could flip as well Drivers: History is on the Democrats side: in every off year election since the Civil War, the President s party loses, on average, 32 House seats In 2010, after passage of the ACA using the budget reconciliation process, the Democrats lost 62 House seats and six in the Senate Currently, the Republican margin in the House is 24 seats, in the Senate, it is one seat There are a large number of House member retirements, with 20 Democrats and 38 Republicans retiring or seeking higher office Unites States House of Representatives: Democrats need to pick up 23 seats from Republicans to regain the majority As of August 24 th, there are 58 open House seats: 38 Republican seats and 20 Democratic seats Republicans have 35 seats in the toss up or worse category, while Democrats only have 3 seats in that category A few Republicans in toss up / moderate districts have benefitted from Progressive Democrats winning primaries (i.e. KY 06, NE 02) Several GOP held seats are almost certainly flipping Democrats likely need to take a smaller number of competitive seats than 23 perhaps as few as 15 Pennsylvania s redistricting adds to GOP woes Could Speaker Ryan s decision be a signal? Do special election results indicate a Democratic wave? United States Senate: Republican majority Democrats are defending 25 seats and need to win 28 races to win back the majority Republicans only need to defend 8 seats Of the 25 Democrats up for re election this cycle, 10 are in states that voted for Trump in 2016 The most competitive races are expected to be: FL, IN, MO, ND, WV, AZ, NV, and TN 4

5 A growing Democratic wave could wipe out the Republican House majority That wave may have to grow a little higher still to flip Senate 5