Congress and President Reagan came home from summer vacation last week, bringing with them answers to the political puzzle that's confounded American real estate owners, sellers and investors all year:
Can fundamental tax reforms affecting real estate be enacted in 1985? Will there be major reforms enacted in 1986? Will they bear strong resemblance to the White House's proposals?
In the clear light that shines on Capitol Hill after election-bound congressmen visit their home districts for an extended stay, the answers now can be revealed. In order, they are: No way. Less and less likely every week. Not if balancing the federal budget remains a national priority.
Everything is over for 1985 enactment except the presidential stump speeches and possible passage of a Democratic-shaped tax bill in the House. The Senate, however, won't touch comprehensive tax reform with a 20-foot pole. Even House passage of a major tax bill this fall -- once considered certain under the canny management of Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) -- is in greater doubt following Congress' return from recess. What House members found at home, in the words of one staff member, was that "tax reform has no constituency; it only has enemies."
House Speaker Thomas P. (Tip) O'Neill Jr. (D-Mass.), Rostenkowski and other pro-tax-reform leaders learned the same thing in their own districts. Talk about tax reform and people's eyes glaze over or they see red.
Other issues have American voters up in arms: the massive deficit in foreign trade and the loss of domestic manufacturing employment, lack of congressional action toward controlling the federal budget deficit, and concern over defense expenditures and farm bankruptcies.
Without a sudden surge of popular support for tax reform, "There's no political mileage to getting too far out in front" on the issue and potentially offending local groups, one Ways and Means Committee member said.
The real estate tax reforms proposed by the president are particularly explosive in home districts, according to staff members.
Rostenkowski is under pressure in Chicago to retain investment tax credits for rehabilitating historic and other older buildings. Rostenkowski was the principal congressional author of the rehab tax credits and has watched them stimulate renovations that might have been bulldozed.
Several prominent Ways and Means Committee members already have signaled their intention to jump ship on one of the highest revenue-generating tax reforms proposed by the president: elimination of deductions for local property taxes by home owners.
Some of the same congressmen also would face a painful political backlash at home if they seek to kill tax-exempt bonds issued by local agencies. That's one of the most important forms of financing for first-time home buyers, small-business development and moderate-income-apartment construction. President Reagan's tax plan calls for terminating billions of dollars worth of tax-exempt bond financing for housing and economic development as of 1986.
City, county and state officials, many of whom represent the local political backbone of congressmen's party structures, oppose any abrupt diminution of their traditional opportunities in the tax-exempt bond market. Congressmen who had any doubt about their local mayors' and city council members' feelings got an earful at home.
Despite the substantial forces opposing '85 enactment of tax legislation on Capitol Hill, there are reasons why the House may pass some form of compromise tax bill before adjourning for the year.
Rostenkowski, for one, sees House passage as the only way to get the tax-reform onus onto the Republicans' shoulders and off the Democrats'. If the Democratic-controlled House can shape and pass its version of a reform package -- incorporating some of the president's tax-rate cuts but rejecting his hottest potatoes -- the Republican-controlled Senate will be stuck with the mess. "Far better to go home for reelection and say, 'Hey, we tried to pass a tax-simplification bill , but those terrible Republicans in the Senate blocked us,' " one Democratic staffer said.
Even Republican House members might be attracted by the same strategy: putting themselves nominally on the side of "reform" in 1985, without risking any real possibility that it would happen this year. Where does this scenario leave real estate buyers and sellers who are trying to plan for this tax year and beyond?
Two points are worth bearing in mind. With no enactment in 1985, the effective dates for any subsequent reforms (doubtful though they may be) will need to be pushed back at least six months from their present dates. That gives investors additional leeway to enter into the binding contracts for purchase, sale or financing that any law changes would "grandfather."
Second, buyers and sellers should focus on the sobering scenario of a stripped-down, less-comprehensive revenue-raising tax bill in 1986 as more likely than a massive overhaul. Such a bill could combine some of the least-palatable features of the current proposals with less-generous reductions in individual and corporate tax brackets. Unlike the president's package, the bill would help stem, not increase, the red ink flowing from the federal budget. More to the political point, a mini-reform bill actually could pass.