Gearing Up for President Obama
Dec 1, 2008 12:00 PM, By Mike Janssen
What the retail real estate industry should look for under a new administration.
Voters across the country celebrated Barack Obama's historic electoral victory pouring on to the streets in spontaneous celebrations as America elected its first black president, but lobbyists for the retail real estate industry probably weren't part of the crowds. On several key issues, the Democrats' proposals suggest that 2009 may bring some heated legislative battles and groups such as the ICSC, the Institute of Real Estate Management (IREM), the Real Estate Roundtable and others may be gearing up for fights on several fronts.
Perhaps the sole blessing for the industry is that Democrats still may fall short of attaining 60 seats in the Senate, missing a chance at a filibuster-proof majority that would have greatly enhanced their power to pass legislation. As of press time, the Democrats were in control of 55 seats and two others were in the hands of independents that caucus with the Democrats. Three races have yet to be decided — Alaska, Georgia and Minnesota. Alaska and Minnesota are in the process of counting and recounting votes. In Georgia there will be a runoff. Many are hoping the Republicans end up with more than 40 seats to prevent the Democrats from gaining that filibuster-proof majority. Filibusters used to be a rarity. In the 1960s, no Senate term had more than seven filibusters. In 2007 and 2008, by contrast, there have been nearly 300 filibuster clotures. “When there are some tough issues that come up before the Senate, at least there's a way to procedurally hold them up if need be,” says Betsy Laird, senior vice president of federal government relations for ICSC.
Issues the industry is concerned about include Obama's tax proposals, often the mirror image of the more business-friendly plans floated by his Republican rival, Sen. John McCain. ICSC is watching the fate of President Bush's tax cuts, the temporary repeal of the federal estate and gift tax, and reduced capital gains tax rates, all of which are set to expire in 2010.
The issue of raising taxes on carried interest, a longtime bugbear for retail real estate, may find new traction in the coming years under President Obama. Carried interest is the share of profits that serves as compensation for a general partner in a limited partnership or limited liability corporation. Now classified as capital gains, this income is taxed at a 15 percent gains rate. But in recent years lawmakers have been pushing to tax carried interest as ordinary income — which would set a much higher maximum rate of 35 percent.
Legislators who favor the increase often cite employees of investment funds as a key target of new legislation. But retail real estate groups point out that real estate deals make up a significant number of partnerships. More than 46 percent of partnership tax returns in 2005 stemmed from real estate, according to ICSC.
In June, ICSC joined IREM and the Real Estate Roundtable in signing a letter opposing legislation to raise taxes on carried interest. The proposal “would magnify the current economic troubles by first and foremost cutting the after-tax return of entrepreneurs — a disincentive to economic risk-taking,” they wrote. “Because the proposal punishes general partners for aligning with equity investors, they will be pushed to substitute that equity with debt to avoid a carried interest arrangement.”
A rate increase would especially effect higher-risk deals such as brownfield redevelopments or those in underserved communities, the groups argue. And workers would suffer from lower wages and fewer job opportunities, they say. The Certified Commercial Investment Member (CCIM)Institute also disapproves of higher taxes on carried interest.
Despite the industry's opposition, an Alternative Minimum Tax Relief Act that would raise carried interest taxes passed the House of Representatives in June, but stalled in the Senate. However, ICSC expects the issue will arise again as lawmakers look to offset future tax cuts. In addition, Obama has said he favors the change. The composition of the Senate, now heavier with Democrats, could again be a deciding factor. Supporters of higher taxing of carried interest, such as the Coalition for Tax Justice have argued the issue is tax fairness. “Should wealthy fund managers pay a lower tax rate on income they receive for their work than the people who clean their offices and answer their phones?” the group argues.
Obama's stance on other policies has also sounded alarm bells. He has proposed raising taxes on capital gains to 20 percent for families earning more than $250,000 a year. Industry groups favor a lower capital gains rate on the principle that it spurs more investment in shopping centers. Obama also has suggested keeping corporate taxes at 35 percent — McCain favored a cut — and raising taxes on higher-income individuals and families.
Card check momentum
ICSC and CCIM would also like to see movement on a lesser-known tax issue that they have been unable to gain traction on for years, one that neither McCain nor Obama discussed often: an Internet sales tax. Presently, Web retailers without physical stores do not collect sales taxes, while those retailers with traditional stores are required to do so. “This is not only unfair to traditional brick-and-mortar retailers, but costs states billions of dollars in lost revenue,” ICSC says.
