Can the 114th Congress Make a Difference?

This past autumn, almost every candidate for federal and state political office ran on economic issues. As we look ahead to the post-swearing-in challenges facing the new, Republican-led Congress, the question arises: Can the incoming leadership in Washington make a difference to U.S. real estate markets and, by extension, the national economy?

The list of tests facing the new Congress is lengthy. However, for the real estate industry, they fall into two primary challenges—bipartisanship and tax reform—which are followed by a laundry list of secondary policy concerns.

We know that we are facing a period of divided government. But division need not mean paralysis. Looking to the past, there is precedent for divided governments working together to pass important legislation. There are several reasons to hope that the new Congress will find its way toward a similar spirit of bipartisanship.

First, the self-interest of political candidates—those newly elected and those planning to run for office in 2016—shouldn’t be denied. As noted above, few issues were as important to the recent crop of incumbents and challengers as the economy. Virtually every candidate committed to delivering solutions to spur the nation’s slow recovery. In 2016, the entire House, one-third of the Senate, and the presidency will be up for grabs. If individual candidates and parties expect to repeat their electoral victories, they will need to make good on those promises. That alone is a strong incentive for getting things done.

Second, there are encouraging efforts underway to reach across the legislative aisle. The bipartisan support of the recently passed omnibus spending and tax extender bills is a positive indicator. An additional example is the work by Sens. Rob Portman and Jeanne Shaheen to pass the Energy Savings and Industrial Competitiveness Act. The Act is intended to not only strengthen national model building codes, but also to support worker training and job creation, investment in public schools and other public and private buildings, and the development of tax rebate and other programs. In early votes, the bill received strong bipartisan support.

In another case, the Terrorism Risk Insurance Act is set to expire at the end of 2014. Without a financial backstop for worst-case scenarios, many insurers and reinsurers would cease providing terrorism insurance, and many businesses would be unable to afford policies offered by providers that remain in the market. A prolonged lapse in TRIA would mean a significant slowdown in major economic sectors, especially real estate. *

Key federal lawmakers from both parties agree that the act is vital to future growth. Even one critic of TRIA, Republican House Financial Services Committee Chairman Jeb Hensarling, made significant compromises with Senate Democrats and sought a bipartisan agreement that would have extended the act through 2020 with reforms that would reduce taxpayer risk. Unfortunately, a lone (and set-to-retire) Senator effectively blocked consideration of the bill in the Senate for extraneous reasons. With only hours left before the Senate adjournment, the bill was shelved, but it is likely to pass after the start of the New Year given the broad bipartisan and bicameral agreement.

Comprehensive tax reform is another key test for congressional leaders and the president. Again, there is general agreement that the current tax system is overly complicated, outdated, and fails to efficiently produce revenues or promote national competitiveness and growth.

There is also general consensus on some of the objectives of tax reform: both parties would like to see a reduction of individual and corporate tax rates (although Republicans would prefer to see lower rates). Both parties would limit the use of tax credits and incentives for certain taxpayers. However, since the majority of real estate operating businesses and investors are pass-through entities, such as limited liability companies and limited partnerships, comprehensive tax reform that fails to conform corporate tax rates with those of pass-through entities will further distort the tax code and subsequent business decisions.

Of course, calls for tax reform are like boys crying wolf: since the last major tax reform package was passed in 1986, demands for an overhaul of the code have become political background noise. Given the recent failure to agree on a longer-term tax extender package, one couldn’t be blamed for being skeptical. However, the incoming Senate and House majority leadership not only appear to have the will to push for tax reform, they may also have the clout to bring recalcitrant Republicans and moderate Democrats into the circle. Importantly, a package of tax provisions may be modest in scope and still be branded as tax reform. And of course, even a modest tax bill could have a material impact on the real estate industry.

The industry must not sit on the sidelines during the coming tax reform debates. There are provisions on the table that would affect everyone—from homebuyers to large pension funds—who invests in real estate. And while there are strong motivators for elected officials to act, the window of opportunity is narrow. A failure to act during 2015 will make the odds of agreement longer in the following year, when both the White House and Congress will be up for grabs.

Further, responsibility for action does not fall on the shoulders of Congress alone. President Obama must take a lesson from President Reagan’s tax reform efforts of 1986. At that time, the president assembled a team of Treasury and White House officials, whose primary purpose was to create a bipartisan tax bill that would make it to his desk. President Obama cannot afford to be any less engaged if he wants to see similar measures come to fruition during his final two years in office.

In addition to comprehensive tax reform, there are dozens of other legislative and policy questions that will help determine whether the real estate sector continues its sluggish pace of growth, or begins to take the leaps of which it is capable. Questions involving immigration (which affects the supply of construction workers across all skill levels), policies under the Foreign Account Tax Compliance Act, particularly in the area of real estate investment, and the tax treatment of carried interest (which is a major concern for private equity real estate investors), among other issues, must also be resolved in ways that will help grow the sector.

The new Congress and President Obama have a limited, but important opportunity to create an investment environment that promotes economic growth and efficiency in one of the most critical sectors in our economy. By making the right bipartisan decisions, our federal leaders can boost our national competitiveness, improve energy efficiency, and create much needed quality jobs.

*This story appears in Mortgage Observer‘s print edition of January 1. Since its publication, the renewal of the Terrorism Risk Insurance Act was approved by the U.S. Senate.