Remarks by:
Richard Michael Price, Esq.
Counsel to CARH
Nixon Peabody LLP
202.585.8716
www.nixonpeabody.com
TAX DRAMA IN THE CONGRESS
Welcome. I see that it’s stopped raining for the first time in months and months, so for the first time we can see the yellow-orange sun, which sort of matches our security threat level here in Washington.
It’s been very interesting, the past few months. You know normally I sort of think about the dry topics of Washington speeches, I know that everybody in this room is interested in all these dry topics, but we really did watch a kind of soap opera play out in Washington these past few months, with the tax bill.
Basically, we now have a new tax cut bill. Maybe I’ll start with the provisions of that bill, and then I’ll give you a little bit of background in what happened in getting here.
WONDERFUL CUTS
So we’ve got this wonderful capital gains and dividend tax cut, which lowers the dividend and capital-gains rate down to 15%, at least for the years 2003 to 2008. One hallmark of this bill is that nothing goes in any kind of smooth direction, everything is temporary or cut off or whatnot, because of the wheeling and dealing that went on.
Low income taxpayers are going to pay 5% on capital gains from 2003 to 2007, and no taxes in 2008. And everything is set to expire at the end of 2008. Which is probably not going to happen, I would imagine there will be extensions, but that’s also part of the drama that’s in this bill.
Interestingly, hidden in this is kind of a pseudo-exit tax relief. You know, we’ve talked about exit tax relief as something that’s in our aging portfolio paper now, and lo and behold, when we weren’t looking for it, all of a sudden we get our capital gains tax rate reduced, so that negates this strategy to make the taxes lower on a lot of property. I’m not quite sure that that jump starts any new jobs or places any factory orders, but at least it’s one for our side.
There’s an exception for small business expensing. We’ve increased expensing from $25,000 to $100,000. But again that’s phased out — this is for taxable years 2003 to 2005. There’s a depreciation bonus, there’s a child tax credit — and there was a lot of wrangling about that towards the end of things — and there was a 10% lowering, basically, of income taxes on the folks at the bottom end of the income tax structure as a way to counterbalance the argument that this was a tax break for ’the wealthy. So we get some tax breaks for people at the lower end.
RATE REDUCTIONS
The marginal rates have been reduced or, I should say, the reduction in the new tax bill accelerates the top tax rate reduction, which comes down to 35%. There’s marriage tax relief in the bill, and then there’s also relief for the AMT, the Alternative Minimum Tax. This is far too complicated for me to understand, but basically inflation has created a situation where folks who are statistically middle class have to pay an Alternative Minimum Tax — which was meant to be a tax on the super rich — simply because that process has been in effect for so long that it needs an adjustment for inflation.
But what really happened to all this? This is kind of neat because what we’ve got here is a $350 billion tax relief bill that started off as a ten-year, $726 billion bill.
Actually, it didn’t even start up there; it started out as a kind of rumor at the end of last year, the beginning of this year, and some of the Democrats on Capitol Hill thought they would jump the gun and come up with a $350 tax relief bill. Well, that kind of played right into the hands of this Administration.
A DISCIPLINED ADMINISTRATION
And you’ve got to give it to this Administration, they’ve done what the Clinton Administration and the Reagan Administration both said they were going to do. They both said that they were going to take a couple of specific, isolated issues and stick with them, run them all the way home. And, you know, Ronald Reagan tried to balance the budget while increasing spending and cutting taxes, and it didn’t quite work out that way, things got off message, and Clinton tried to balance the budget and tried to do a few other things, and that didn’t quite work out that way and things got complicated.
You have to hand it to the Administration, they’ve stayed incredibly disciplined and incredibly focussed on their task. So much so that there have been remarks in the local press and from folks around the Hill about how much deference the Congress is actually giving this Administration in spending bills and spending measures. And a lot of it is obviously a residue from success and from what’s happening in Iraq, and the sort of Presidential manner in which this President is striving these days. If you remember, it wasn’t too long ago where the President was the butt of a lot of late night comedy shows about his stature or lack of stature. We don’t hear those jokes anymore. I mean, he’s certainly vindicated that part of his role.
THE PROPOSAL
So in hearing about this maneuvering by Democrats, the Administration came out with this massive tax cut bill, which originally was estimated to cost up to $670 billion and which was revised up ultimately to $726 billion over ten years.
The main centerpiece of this was an end to double taxation. I think at our last meeting I railed at some length about how there really isn’t such a thing as double taxation on corporations. There’s no more double taxation than there is on other people moving money around the economy, but putting that argument aside for a second, that was their centerpiece.
The problem with that, though, is that if you basically say to a corporation, the best way to shelter your income from taxes and to pay dividends is not to do any sheltering at all — in other words, make a choice between sheltering your income up front and just paying dividends without any taxes on them — that corporation is going to do the simpler thing, and frankly the more cost-effective thing, and just pay the dividends out without any taxes. So that means the tax shelter industry, such as long-term tax credit and the other tax credits, would lose a lot of business.
LAW OF UNINTENDED CONSEQUENCES
Interestingly, my understanding from the folks at the Treasury Department, is that they didn’t really expect this effect, because, after all, one of the domestic centerpieces of the agenda of this Administration is the Single Family Housing Tax Credit. So why would the Administration propose a measure that contradicts the single family housing tax credit measure thaôt they’re currently proposing?
Well, I think you could say they caught themselves by surprise. So basically in April and May conservatives in Congress rose up on the side of the plan, the House passed a measure of about $550 billion with this end-of-double-taxation proposal, and the Senate stuck with their own $350 billion. This is where it really gets interesting.
THE DRAMA UNFOLDS
Basically, the House made a compromise with Bill Frist (R-Tenn), the Senate Majority Leader, on a $550 billion package. But Senator Grassley (R-Iowa), Chairman of the Finance Committee on the Senate side, didn’t want to go that far. He wanted to have at least some sense of fiscal discipline. He wanted to stick with $350 billion, or something around that level.
Basically, what the drama that unfolded was that you had two Republican Senators, Lincoln Chafee (R-RI) and John McCain (R-Ariz), who didn’t want any tax cuts. They wanted to focus on balancing the budget first. They had two other Senators — George Voinovich (R-Ohio) and Olympia Snowe (R-Maine) — that wanted a tax cut of no more than $350 billion. Why $350 billion? I don’t know, but that was what was settled on.
So the agreement was reached with Bill Frist to keep the tax cut at $350 billion. But here’s the fun part: Bill Frist forgot to tell the Administration or his counterpart over on the House side, Speaker of the House Hastert (R-Ill), about that deal change first. So the Senate comes down with its $350 billion plan, and the House comes down with $550 billion, and there’s a lot of screaming.
REMEMBERING MAINE
You’ve got some folks here from Ohio? And you’re from Maine? Did you see those television ads about George Voinovich and Olympia Snowe, about how the French, they weren’t supporting us in Iraq, and George Voinovich and Olympia Snowe, they didn’t support us on the tax cut bill, so maybe they’re like the French? So there was a very interesting set of ads that the Administration said they weren’t responsible for, but they didn’t condemn them either. The really fun part about this is that something like 40% of the citizens in Maine have a French heritage of some sort, so this was actually reassuring to them. Saying that Maine is French is kind of like saying America is capitalist, that’s not a bad thing.
So that backfired pretty badly, and was a source of some chuckles around Washington.
But then, around the same time — this is unprecedented — we saw a maneuver where basically the House was going to try to propose its legislation, the Senate was going to try to propose its legislation, they were each going to pass their own bill, and somehow later on down the road in some kind of conference or some kind of an arrangement with the Administration, they would just implement them in some kind of unified fashion.
I never quite understood this myself, simply because it’s so highly unconstitutional, my mind just can’t process it. If this maneuver had been successful, it would actually have changed the balance of power in the country, that’s how basic and important that was. But I found it not surprising that that course had died a fairly quick death, but what surprised me is that it was discussed so seriously at high levels of government.
THE LOGJAM BREAKS
The logjam began to break, and basically Congressman Bill Thomas (R-CA), Chairman of the House Ways and Means Committee, proposed his own proposal. And that was the so-called “5/15” proposal, for the 5%/15% tax cuts on dividends and capital gains. What’s interesting about this is that, as I understand it, the Administration was rather upset with Congressman Thomas, even though he’s a part of the governing group, simply because the folks in the White House wanted not just a tax cut, but their tax cut, and there was, let’s say, an interesting waiting period in which you saw this problem unfold and folks like us liked the 5/15 proposal, and then eventually on the Senate side they bought the 5/15 proposal as well. And it wasn’t a foregone conclusion that the Senate was going to take this.
THE TIEBREAKER
And what I find also to be very fascinating was that the final vote in the Senate was 50-50. The Vice President had to cast the tie-breaking vote. I mean, that’s a heck of fight. Now, the reason it was 50-50 is that a number of Republicans I mentioned crossed over to the Democratic side, but also Democrat Zell Miller (D-Ga) crossed over to the Republican side, so there was a little bit of gamesmanship there.
Now, what’s the fallout from all this? The result of all of this is that we know there are at least some tax credit ventures that have shied away from buying credits, or at least buying as many credits. There have been some reports about that, some discussion about that. I don’t think there’ll be any permanent damage, but it did certainly scare some people.
AN END TO FISCAL DISCIPLINE
Also, the concept of fiscal discipline that has occupied the thoughts and wishes and desires of public Washington at least since the 1980s is up. For the last half dozen years there’s been a real tug of war. You’ve probably heard Ray James stand up here and talk about how if you want to get more money for 515, you have to take it from another pot. There’s a zero-sum balance going on. That’s broken up. You won’t hear that discussion probably any more. There isn’t that problem of, “Oh, OK, if we give money to you, we can’t give money to them.” Of course there’s on overall, overarching concept that we’re spending too much money anyway. The Congressional Budget Office is predicting a $300 billion deficit for this year, which is historic. Goldman Sachs is predicting that number to be $425 billion. And the Democrats — they’re Democrats, they’re going to be doom-sayers anyway — but they’re going for a big $500 billion deficit for the year. And some are thinking that they may be right.
PAYING THE BILL
The point of the tax cuts was that they’re supposed to stimulate our economy, but what I found interesting was that the Joint Committee on Taxation was asked to predict the economic effects of the House’s $550 billion tax cut, and they used their methods, and by their methods came up with a 0.2% increase in GDP between 2003 and 2008. That’s up to $14 billion extra a year, net effect. So what we’re getting is a loss of fiscal discipline which in the short run might actually be of benefit to us, but long run we’re going to have some bills we’re going to have to pay. When I say long run, I mean in the next five years.
There have been some commentators writing for Fortune magazine who claim the effect of the tax cut is going to be minimal. And what I found personally interesting was that Warren Buffet, the Oracle of Omaha, came out opposed to any tax cut.
So I think what we’re going to find is that these tax cuts are going to look interesting in the short run. I think we’re going to want to protect capital gains tax cuts as a benefit to us, but we’re going to basically in the next couple years start to hear about how we’re going to have to start balancing the budget again. How is that going to play out? You know, we’re all going to have to be sensitive to that and keep our eyes and ears open.
BLOCK-GRANTING SECTION 8?
But there are some more mundane things that are happening that kind of echo this kind of change, the change of the scope and role of government. We’re going to cut taxes and we’re going to view things differently, which is the block-granting of Section 8 Vouchers.
And when you think about it, this is fairly historic, because vouchers are already local, meaning you have a voucher manager, he’s got how many people in his office? A dozen people, two dozen people tops; they administer the Section 8 Voucher program. They do all that work.
You have people in HUD local offices, certainly, but basically you have the better part of 3,000 public housing authorities out there that administer the voucher program. It’s already as local as it’s going to ever get. In point of fact, if the Administration’s proposals go through, you’ll get less local, not more local, because you’ll see block-granting going out onto the States. Which I personally find amazing.
CONSTITUENCIES
So why would you do this? Well, there’s the theory that if you move everything into a big block and you send it out, it’s eaÎsier to shave off parts of that block, and reduce spending. On the HOPE VI side, the Administration proposed zeroing out this program, this program which was due to sunset this year, but you know nothing ever really sunsets. Which is why the 2003-2008 time period that I was just mentioning really isn’t 2003-2008. You know, once something gets into legislation and you’re getting a buildup behind it, you get constituents, there’s the effort to push things forward. In point of fact, on the tax cut side, the Speaker of the House has already vowed to make all those tax cuts permanent. So like other programs, the Hope VI has a constituency. I’m among the constituents, I think it’s a very good program; we do a lot of work in the area. But what’s interesting is that even the Assistant Secretary of Public and Indian Housing, Michael Liu, has been quoted as saying that HOPE VI was successful and we don’t need any more money. Well, that’s news to a lot of people who are trying to do HOPE VI deals, trying to do applications for HOPE VI deals. So luckily there is legislation that’s been proposed by other folks in the House and the Senate, that has a lot of support from both Republicans and Democrats, that would reauthorize the HOPE VI program but also to re-appropriate additional funds.
REDEFINING THE RULES
And even on a more mundane level, there’s the issuance of a new circular A-76, which is a revision of an old circular. Very bright stuff. But here’s what it does. It basically redefines the rules for finding when to contract out government positions. So there are about 1.8 million Federal jobs out there, and 800,000 have been deemed to be conformable, of the same nature, as private sector jobs. So approximately 425,000 jobs are on the block for the first slice to contract out. And they may be drawing troops from the people in this room to actually do some of that work. What does that mean? I don’t really know, I haven’t seen a full list of jobs. But that’s again part of an inexorable move, I think, toward changing what the federal government does as opposed to what the state governments do.
While I was watching this very interesting tax credit drama unfold, a few other efforts were under way. And 3560 is out. And I think everyone knows that now, we’ve spent all day talking about that in the other room, so there’s actually a culmination of this seven-year effort.
VA v. HICKS
The Supreme Court has continued to hear cases which it’s been receiving periodically, the most recent one is Virginia v. Hicks. And this one is like the Rucker case last year. [HUD v. Rucker is the Public Housing case in the Supreme Court affirmed the HUD rules regarding eviction of residents with guests or co-residents, not just ON properties, but also off site, with drug-related crimes.]
Virginia v. Hicks is about the ability of housing authorities to exclude persons from their property. And the concept here is basically, can the PHA arrest a nonresident for trespassing when he has ostensibly no legitimate business or social purpose? In other words, you have somebody that’s loitering, can you arrest them, can you evict them, can you exclude them from your property? That’s really a question for the Supreme Court. So we’ll watch that and see how that develops, because that plays right into all these issues of security and project operations of this type that we’ve been dealing with.
HUD has published their rules for public housing homeownership. That was made in the March 11 Federal Register. I personally have some questions as to how that’s actually going to be work in the field, but that program is out there.
OTHER PRESERVATION LAWS
We’re starting to see a trend out there in preservation, in state and local preservation laws. I was trying actually to get through some of the federal preservation requirements, we were running headlong into state and local preserìvation prohibitions. There was a series of states — off the top of my head, Maryland, California, Washington State, Rhode Island, Minnesota — that have state preservation and prepayment notice requirements. And also required in California, for example, you not only have to give a year’s notice of prepayment, but you also have to give the opportunity to buy the property or to make an offer to buy the property to a whole wide swath of different people. So this is starting to catch some people off guard as various states are beginning to enforce it. So that’s a warning to the folks out there.
Many of these laws, by the way, have been out there for some period of time, but in some places, such as Connecticut, the Legislature is, as we speak, considering adopting just such a measure. So I guess as the Administration invites people in government to be more active, I guess the overall theme and message is that they are getting more active. And that’s maybe something to keep our eyes open to.
So I’d say it’s been an interesting last few months.
Thank you.
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