President Joe Biden is halfway on the path to achieving the first major legislative victory of his administration, with the House of Representatives last Saturday passing its version of his proposed $1.9 trillion COVID relief bill, the American Rescue Plan, by a 219-212 vote. The vote on the bill was a highly partisan affair, with all but two Democrats voting for it and all Republicans unified against it. The Senate has begun debate on the measure this week and will likely pass its measure by Saturday.
Despite the Republican opposition that is expected, Democrats are confident of holding the support of the Senate’s 50 Democrats and Independents, allowing Vice President Kamala Harris to be the tie-breaking vote, as provided in the Constitution. Congress is moving the COVID relief bill using the statutory budget reconciliation process, which allows the bill to be exempt from a Senate filibuster, which can only be overcome with three-fifths of the Senate (60 senators) voting to shut off debate. As a result, the reconciliation bill can pass with a simple majority vote.
There will be differences between the House bill and whatever the Senate passes, however. The advantages of budget reconciliation come with a downside. What may be included in the legislation must have an effect on federal budgetary spending or revenues, and not merely an incidental one. The Senate parliamentarian enforces the “Byrd rule”, named after former Senator Robert Byrd, which mandates that extraneous authorizing language be removed. Congressional staffers closely review every provision in a reconciliation bill to ensure compliance (referred to as giving the bill a “Byrd bath”). The House included an increase in the minimum wage in its version of the COVID relief bill, and that language was ruled to be in violation of the Senate’s rules.
The difference over inclusion of a minimum wage increase in the House bill is just one that will need to be resolved after the Senate passes its bill. There will probably be others. The House measure provided increased funding for speeding vaccine production and distribution, an extension of enhanced unemployment benefits, as well as more economic assistance payments ($1,400) to qualifying individuals in addition the $600 provided in legislation enacted in December. These and other provisions will not be subject to major revisions in the Senate version. But the House measure also calls for assistance to state and local governments whose budgets have not been as adversely impacted by revenue shortfalls as had been anticipated. Democratic Senators are considering repurposing some of those funds for other needs, and perhaps greater targeting of assistance to individuals for those most affected by the pandemic.
The House will need to vote again on a final bill, after differences with the Senate version have been resolve. The enhanced unemployment benefits under current law expire March 14, by which Democrats aim to have sent the bill to Biden for his signature.
What comes next?
By all accounts, the White House and Democratic leadership want to move quickly on the president’s “Build Back Better” agenda on infrastructure, perhaps including energy initiatives in the package. In that regard, the reconciliation process used for the COVID relief bill may be a precursor to, and a model for, Biden’s next step on infrastructure. Biden has spoken of his desire to work in a bipartisan fashion on infrastructure, but a considerable number of Senate and House Democrats would prefer to use reconciliation again, lessening the need to negotiate a bill with Republicans.
How Congress proceeds is important for the commercial real estate industry, because unlike the COVID relief bill which contained only a few revenue raisers, the next bill may become a vehicle not only for infrastructure initiatives, but for tax increases that predominantly implicate commercial real estate. Biden’s campaign proposals included some tax measures that are of particular concern to those in the commercial real estate industry, including:
- Capital gains tax rate increases for certain high-income earners, to a top rate of 39.6%., almost doubling the capital gains tax rate on investments for these individuals.
- Elimination of tax-deferred like-kind exchanges (IRS Section 1031).
- Ending capital gains treatment for real estate “carried Interests”, or “promotes”.
- Repealing the current 20% deduction for qualified business income earned by partnerships, limited liability companies, sole proprietorships, and other so-called “pass-through entities for certain taxpayers.
If reconciliation is used again for an infrastructure bill, then the incentives to include provisions that do not garner bipartisan support and would not pass the Senate under regular order will be great. In this atmosphere, Democratic centrists will be under great pressure to support tax measures demanded by their more progressive counterparts that they would not otherwise embrace. Conversely, many Republicans who would be predisposed to support the president on developing a robust infrastructure initiative would be reluctant to engage because of their objections to the process. This generally does not make for genuine discussion on the merits of individual policy proposals and how they may affect our industry, but rather to both sides retreating to their respective corners.
If reconciliation is indeed used for an infrastructure bill, then the support that the industry has received from many in Congress, as well as the strong relationships forged by NAIOP members with their elected officials, will be critical as we work to ensure supportive policy for commercial real estate.
