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.
ICSC supports federal action requiring states to collect taxes owed by out-of-state Internet vendors. The House and the Senate have both introduced legislation that would permit this, but neither version of the bill has moved out of the Congressional committees.
“It's not something a lot of people know about,” says ICSC's Laird of the issue. But she believes that “a perfect storm” of conditions may be coalescing that could raise awareness, with a key element being states seeking sources of revenue as they grapple with the impact of the recession. Rep. Bill Delahunt (D-Mass.) has said he is willing to reintroduce the bill this year, according to Laird.
ICSC quotes an Obama spokeswoman as saying prior to the election that the candidate “is monitoring the work state governments are doing in cooperative working groups to simplify sales taxes and at this point does not support any new requirements without a uniform and simple system for collecting taxes on Internet sales.”
Obama has taken a firmer stand on another issue of concern to trade groups. The president-elect cosponsored the Employee Free Choice Act (EFCA), a bill supported by labor unions, including the AFL-CIO, and strongly opposed by ICSC. The act would ease employees' joining of unions by allowing “card check” — enabling workers to organize by signing cards rather than holding an election.
“ICSC believes the ability of the American worker to vote privately, without peer pressure or fear of recrimination in the workplace, is worth preserving and is a critical aspect of the American democratic tradition,” the group says. Employees might also be unaware of what they're signing when they vote by card check, ICSC has argued.
However, supporters argue that the bill will help worker rights.
“These reforms will level the playing field between management and labor,” Sen. Ted Kennedy (D-Mass.) wrote in an article published on the Web site of the Labor and Employment Relations Association. “Giving workers more powerful weapons will prevent management from using intimidation to harass or nullify union organizing efforts.”
Progress foreseen in energy arena
Before the election, observers felt certain that in coming years legislators would intensify their focus on environmental issues. Obama and McCain differed in some ways on favored approaches, but both argued that the time had come to address climate change, and both supported caps on greenhouse gas emissions. That momentum will continue, says Kent Jeffreys, staff vice president in ICSC's office of global energy policy.
Democrats may be largely at odds with stakeholders in retail real estate on labor and tax issues, but Jeffreys says they may find common ground on details of energy policy. For one, Democrats may be more open to targeted tax credits, which Republicans generally oppose in favor of a level playing field, he says. ICSC supports rewarding tax credits to commercial real estate owners who use renewable sources of energy at their sites.
The newly emboldened Democrats may also be more open to the idea of net metering, which at the moment lacks significant support on either the state or federal level. Net metering would allow commercial real estate firms to offset electricity bills by generating electricity through the use of solar panels or wind turbines. After installing these technologies, property firms would also be able to sell any excess power generated back to utility companies. As it stands, states bar commercial properties from participating in such programs, which serves as a disincentive to use greener energy. “Why would I want to generate more power than I can consume on site if I just have to give it away to utility companies?” Jeffreys says.
There are still some gaps between Obama's energy policies and those of the industry. Obama has said he supports making all new buildings carbon neutral by the year 2030, a goal promoted by the nonprofit Architecture 2030 organization. He also supports setting a national goal of making new buildings 50 percent more energy efficient and existing buildings 25 percent more efficient over the next decade.
“ICSC does not support this inflexible, overly ambitious goal,” the group says. Likewise, IREM favors incentives to promote energy efficiency rather than standards, says Chuck Achilles, staff vice president, with IREM. One example is the $1.80-per-square-foot credit for energy efficiency that was extended until 2013 as part of the Emergency Economic Stabilization Act passed in October.
The CCIM Institute also opposes mandatory national standards. On the issue of cap-and-trade programs to offset emissions, which may get increased scrutiny in coming years, CCIM favors federal funding of further research into such programs. For now, much remains unclear what will happen with issues such as climate change and energy standards. “We're waiting to see some real action,” Jeffreys says. “And I think the country's ready for it.”
Not Keen on Change
Ecstatic voters may have partied in the streets in cities across the country to celebrate the victory of President-elect Barack Obama. But Retail Traffic readers were likely not among the throngs, according to a survey conducted in the week after the election. According to our findings, just 30 percent of Retail Traffic readers were “very” pleased with the election results while 47 percent were “not at all” pleased.
As one reader put it, “I think he will crush the middle class with more taxes, bring about socialized medicine and cause me to downsize my work staff [because of] additional regulatory burdens.” Many other readers also wrote in with concerns about higher taxes and think his plan to “redistribute the wealth” will ultimately worsen the downturn. One reader said, “He will have a negative effect on investment of capital because of his proposed tax structure.”
However, some readers did think an Obama administration will have positive effects. Some think he will restore the United States's global standing and reputation. One reader said his economic and tax policy is a “dose of sanity.” And another said “his election is the beginning of the restoration of credibility in the governing institutions of the United States.”
Overall, 48 percent of survey respondents said they were Republican compared with just 21 percent Democratic. Another 21 percent said they were Independent. The balance were from smaller parties or preferred not to say.
Why aren't readers pleased? Almost half — 45 percent — think Obama's election will not benefit their business and 44 percent think Obama will be bad for business in general. Only 14 percent think Obama's victory will be “very” beneficial and 16 percent said it would be “somewhat” beneficial.
The most important issue to Retail Traffic readers during the election was the “availability of credit” followed by “stability of the nation's financial institutions,” “changes in tax rates/structures,” “economic policies/stimulus programs” and “national security.” Least important to readers were the issues of “minimum wage legislation,” “green energy,” “unionization issues,” “immigration issues” and “environmental regulation.” Readers expect Obama's presidency to most positively affect the development of alternative or green energy while they expect it to most negatively affect changes in tax rates/structure.
Approximately 200 readers took part in the survey.