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Congress fails to pass estate tax and expiring tax provisions.

Republican lawmakers made one last attempt to secure estate tax relief before adjourning for the summer on Aug. 4. After the Senate failed twice to pass some form of estate tax reform, House Republicans crafted what became known as the "trifecta" bill (HR 5970). The measure combined Republican-supported estate tax provisions with a two-year extension of several expired or expiring tax provisions and the Democrat's top priority, a minimum wage increase.

To make the package even more attractive, several "sweeteners" were added to win the support of specific Senators, including a NAA/NMHC-opposed provision that would allow certain taxpayers for one year to deduct the cost of private mortgage insurance premiums (PMI).

The House passed the bill on July 29, but even with the minimum wage and other sweeteners, during an Aug. 3 vote, the Senate was unable to secure the 60 votes necessary to overcome a filibuster, which caused the measure to fail. Before the vote, Senate Majority Leader Bill Frist (R-Tenn.) indicated that this would be the last time this Congress considered either the estate tax or the tax extenders.

Other than the PMI provision, the bill was largely favorable to apartment firms. Perhaps most importantly, the estate tax provisions would have retained stepped-up basis, NAA/NMHC's top priority on this issue. Additionally, the bill retroactively would have extended a provision allowing the immediate expensing of brownfields cleanup cost that expired at the end of 2005. (The brownfields tax provision also would have expanded the current program by making petroleum cleanup costs deductible.)

The estate tax issue will undoubtedly return with the next Congress because unless Congress acts, in 2011, the estate tax exemption will drop to $1 million per person and the maximum estate tax rate will increase to 55 percent. The most recent failed compromise bill would have phased in a $5 million per person exemption from the tax (indexed for inflation) from 2010 to 2015. Estates worth as much as $25 million would have been taxed at the capital gains rate; estates above $25 million would have been taxed at 30 percent. The $25 million limitation would also have been indexed to inflation.

The most immediate impact on apartment firms because of the Senate's failure to pass HR 5970 is the loss of the brownfields expensing provision.

LIHTC Utility Adjustments Urged

NAA/NMHC continue to press the Treasury Department to expedite the review process of a proposal to change the way rents are adjusted on Low Income Housing Tax Credit communities when residents pay for their own utilities. IRS rules require tax credit rents to include a utility allowance for resident-paid utilities; however, the methods currently used to estimate residents' utility costs tend to overestimate. This, in turn, reduces the gross rent received by owners.

NAA/NMHC have been leading a coalition of groups that have asked the Internal Revenue Service (IRS) to allow owners to use more accurate modeling procedures, data from property utility billing and even data from comparable properties. The IRS has been receptive to the request and has drafted a proposed regulation to accomplish it. Unfortunately, the draft remains stalled in the Treasury Department because of competing priorities with tax legislation in Congress. NAA/NMHC staffs have been in frequent contact with appropriate Treasury Department staff to keep the issue on their radar.

Housing Bills Progress in Congress

Before recessing for the summer, Congress acted on several housing-related bills. Lawmakers returned on Sept. 5 for five weeks before adjourning for the November elections, leaving little time to complete new legislation before a new Congress convenes in January.

The House Financial Services Committee on July 26 approved a bill (HR 5503) that would increase the maximum multifamily housing loan limits from 140 percent to 170 percent in geographic areas where cost levels exceed the standard program maximum and from 170 percent to 215 percent in designated high-cost areas. NAA/NMHC and a coalition of other organizations are advocating for the increases. In 2004, the coalition secured passage of legislation increasing the loan limits from 110 percent to 140 percent (170 percent in high-cost areas). That bill also gave the U.S. Department of Housing and Urban Development (HUD) the authority to adjust the limits annually for inflation; before that the levels were set by Congress. It is not known if this new measure will be voted on by the full House this year, however.

The Senate Appropriations Committee on July 20 passed the FY 2007 HUD appropriations bill (HR 5647), making significant NAA/NMHC-supported changes to the administration's proposed budget. Specifically, the Senate changed the Section 8 funding formula to a "budget-based" system that would consider a local housing authority's leasing rates and costs for the most recent 12-month period.

Since 2004, HUD has used a flawed formula, which the House version perpetuates, that looks only at local costs from May-July 2004 (with an index for inflation). NAA/NMHC have long opposed this three-month formula as inaccurate and unpredictable. The bill also extends for five years the Mark-to-Market program, which is otherwise set to expire Sept. 30. The measure now heads to the Senate for a floor vote. Given the short legislative calendar, the unfinished appropriations bills, including this one, may be rolled up into a single omnibus bill.

The House passed a bill (HR 5121) on July 25 reforming the FHA single-family loan program. The legislation would allow risk-based pricing, eliminate the 3 percent downpayment requirement and would also allow 40-year instead of 35-year loans. NAA/NMHC oppose the measure as another costly and unnecessary home ownership incentive.

Feds Respond to Supreme Court's Wetlands Decision

Following the recent Supreme Court decision that the federal government lacked authority to regulate as wetlands certain properties that are not connected to navigable waters (Rapanos et al. v. United States, 2006 WI, 1667087 (U.S.)), the U.S. Army Corps of Engineers (Corps) and the U.S. Environmental Protection Agency (EPA) have issued revised directions to field staff.

In response, the Corps called for a brief suspension of permits related to "navigable waters," swing that it will not change its policies for issuing wetlands permits, but if subsequent guidance is issued that affects the permits, they may be modified. The EPA has instructed its field offices to defer all jurisdictional determinations that require taking a position on the scope of "waters of the United States" until the EPA issues official guidance on the Supreme Court's ruling. The memo also instructs the offices to delay referring any new enforcement actions to the Justice Department until the guidelines are clarified.

NAA/NMHC Continue to Pursue Energy Tax Credits

NAA/NMHC continue to advocate for an extension of the tax incentives included in the Energy Policy Act of 2005 (PL 109-58). These provisions allow property owners to deduct the costs of certain energy-efficient improvements to their buildings. To qualify, buildings must be certified that they will achieve a required level of energy savings and must be placed in service before Jan. 1, 2008. The Treasury Department, however, released interim guidance for the certification process in June 2006. Until final regulations are issued, the incentives are of limited use to owners and developers. Unfortunately, Congress has shown little interest in addressing building energy-efficiency issues.

In August, a coalition of utilities, regulatory agencies and consumer advocacy groups issued a National Action Plan for Energy Efficiency aimed at rewarding utility companies for promoting conservation. Without such incentives, conservation typically reduces utility companies' earnings by reducing revenue. Both Congress and the administration favor supply-side solutions to rising energy costs.

At a recent conference on national energy policy, U.S. Department of Energy and U.S. Department of Interior representatives expressed the administration's strong support for supply-side initiatives. On Aug. 1, the Senate passed legislation (S 3711) that would allow offshore oil and gas drilling in certain areas of the Gulf of Mexico, excluding the Florida panhandle. The House passed a much broader bill (HR 4761) on June 29 that would allow drilling on the Pacific and Atlantic coasts. Unless the House recedes to the Senate version, there is little chance that this measure will be enacted this year.

Information compiled by NAA/NMHC Joint Legislative Staff: Senior Vice President for Government affairs Jim Arbury; Vice President of Housing Policy Lisa Blackwell; Vice President of Capital Markets and Technology David Cardwell; Vice President of Property Management Jeanne McGlynn Delgado; Vice President of Communications Kim Duty; Vice President of Environment Eileen Lee; Tax Advisor Howard Menell; Vice President of Building Codes Ron Nickson; Chief Economist Mark Obrinsky; and Director of Property Operations Betsy Feigin Befus.
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Title Annotation:CAPITOL BEAT
Date:Sep 1, 2006
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