Construction Legislative Week in Review
www.agc.org November 23, 2011
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On the Inside
Special Issue: Super Committee Update
In This Issue
Super Committee Fails, Across-The-Board Cuts Coming in 2013
Budget/Sequestration
Taxes
Spending
Schedule for 2011 and First Half of 2012
3 Percent Victory
President Makes 3 Percent Withholding Repeal Law
Special Issue: Super Committee Update
In This Issue
 

The super committee’s failure to reach an agreement perpetuates the government inspired instability in the construction market.  There is no real long-term plan for orderly spending prioritization and/or spending cuts. There is no clarity to long-term tax policies that impact capital formation and capital investment.  There is no plan for the long-term government programs for capital investment like transportation, buildings, water and military.  In fact, the failure of the super committee could lead a rational person to believe that things are worse in Washington, D.C. than they were before the debt limit drama back in July and August. To add perspective, the super committee was tasked with cutting $1.2 trillion out of about $45 trillion in federal spending over the next ten years.  This week, we are making an effort to analyze the politics and the real ramifications of the super committee’s inaction on the legislative agenda going forward.  AGC did have a significant victory with the repeal of 3 percent withholding and we will continue to look for opportunities to make progress on additional legislative goals during the 112th Congress.

AGC will continue to work to make sure Congress understands the importance of construction programs when making the cuts called for in the Budget Control Act.  We are also focused on seeing final action on multi-year authorizations for major construction programs like transportation and water.  We are looking for some stability in the tax code and looking for additional ways to simplify the tax code like we did with the repeal of 3 percent withholding. Major appropriations bills and possibly a tax bill will get headlines for the next few weeks.  Next year will be a big struggle to create a climate that supports significant long-term construction investment and comprehensive tax reform.  

For more information, contact Jeff Shoaf at shoafj@agc.or or (202)547-3350.

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Super Committee Fails, Across-The-Board Cuts Coming in 2013
 

On Nov. 21, the Joint Select Committee on Deficit Reduction announced they had failed to come to a bipartisan agreement on deficit reduction measures.  The super committee’s failure means that $1.2 trillion in automatic cuts known as “sequestration” will take place in 2013.  The more immediate impact of the committee’s failure is Congress must now deal with several issues that were assumed to be addressed in the deficit reduction plan.

In addition to creating the super committee, the Budget Control Act created a process to enact budget cuts regardless of the committee’s outcome.  The cuts totaling $1.2 trillion will come from defense ($450B), non-defense ($300B) and entitlement programs ($170B) starting in 2013.  According to the Congressional Budget Office, as a percentage of defense spending, nothing will be cut more than 10 percent.

The failure of the super committee will also alter the Congressional agenda for the remainder of 2011 and the beginning of 2012. Congress must now deal with expiring provisions and programs that were put on hold while the super committee deliberated their plan. These issues include extension of the payroll tax cut, extension of unemployment insurance, Medicare “doc fix” payment adjustment, energy tax credits, credits for depreciation on capital investments, Alternative Minimum Tax relief which all may be wrapped up into a tax extenders package.  In addition Congress must now focus on finishing efforts to fund the government for the fiscal year that began Oct. 1 and decide how to approach the infrastructure authorizations such as water, aviation and surface transportation that were thought to be addressed by the committee’s final package.

For more information, contact Jeff Shoaf at shoafj@agc.or or (202)547-3350.

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Budget/Sequestration
 

The sequestration process that has now been triggered will need to cut the deficit by $984 billion over ten years.  This number reflects the $1.2 trillion in cuts outlined in the Budget Control Act minus the interest savings that will be achieved from deficit reduction. The result is that a little more than $100 billion in deficit reduction will be achieved annually through sequestration.

For mandatory spending programs, the cuts will be done automatically each fiscal year.  Construction programs funded from the Highway Trust and FAA Airport Improvement Program – which are considered mandatory spending – are exempted from these cuts but limited to the revenue in the respective trust funds.  For discretionary spending programs, the cuts will be done automatically in FY 2013 to discretionary spending programs in the sequester base. For FY 2014-2021 the discretionary sequester is achieved by lowering the discretionary spending caps by the sequester amount. That will allow the House and Senate Appropriations Committees to make the choices about how to achieve those spending cuts on a program-by-program basis rather than via an across-the-board spending cut.   Both the across-the-board cuts and lower spending caps will have an impact on federal construction programs that are considered discretionary. 

Since, these cuts will not go into effect until 2013 AGC will continue to make the case for construction and will work with all members of Congress to illustrate the impact that construction spending has on our economy and the role these investments can play in deficit reduction.

For more information, contact Sean O’Neill at oneills@agc.org or (202)547-8892.

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Taxes
 

The failure of the Super Committee also sets the stage for a busy year for tax policy with a number of important tax rates and expenditures set to expire starting on Jan. 1, 2012.

First, the annual “Tax Extenders” package expires at the end of the 2011. This bill includes popular tax expenditures that expire every year such as the research and development tax credit (which can be applied to unique designs, structures, or construction practices) and accelerated depreciation for restaurant and leasehold improvements, both of which impact the construction market. Congress typically renews these tax provisions late and is forced to make them retroactive to the first of the year. The fact that tax expenditures like these were targeted by the super committee and the poor track record of timely completion adds to the uncertainty that adversely impacts business decision making.

Further, Congress often extends the Alternative Minimum Tax (AMT) “patch” along with the tax extenders to protect millions of middle-class taxpayers from being hit with higher taxes. The AMT patch is currently in place for 2011 but not for 2012 or beyond. This provision will likely have the largest impact on AGC member companies.

Second, the 100 percent bonus depreciation and enhanced section 179 expensing levels expire at the end of 2011. Starting Jan. 1, 2012, the bonus depreciation returns to 50 percent, while section 179 reverts from $500,000 to $125,000 in 2012 with phase out limits lowering from $2 million to $500,000. Bonus depreciation is an immediate deduction of the cost of new equipment, such as construction equipment, purchased and placed in service whereas section 179 allows a deduction for the cost of new or used equipment.

Likely to grab the headlines over the course of the next few weeks is the expiration of the reduction in payroll withholding which impacts every wage earner and the continued extension of unemployment benefits, which has been extended to 99 weeks for the last two years.

At the end of 2012, Congress must again face the expiration of the Bush-era tax cuts which were extended at the end of 2010. While President Obama supported their extension in 2010, there is a fundamental disagreement between Republicans and Democrats about whether to extend the tax rates for all taxpayers beyond 2012. In addition, there are two new income taxes going into effect on January 1, 2013 that were enacted in the 2010 healthcare law on high earners, which could make the top individual rate higher than 44 percent, up from 35 percent today. A tax increase of nearly 10 percentage points on individuals will have a significant impact on the nearly two-thirds of construction companies organized other than as a C corporation and thus pay business taxes at the individual level.

The expiration of the tax rates, along with the continued policy debate on deficit reduction has already lead to a serious discussion on comprehensive tax reform with both the House and Senate tax writing committees having already held a series of hearings on the topic and various proposals having already been unveiled. Both sides of the aisle agree the policy debate should take place, and there is sometimes agreement on keeping corporate and individual tax rates as low as possible by reducing or eliminating tax expenditures (i.e., deductions and credits). However, like the Super Committee effort, reaching a consensus even when faced with a deadline – and next year’s looming Presidential and Congressional election – may be impossible. As a result, both businesses and individuals may face another year of tax uncertainty during which they hold on to cash and postpone or cancel decisions that would otherwise lead to increased demand for construction.

AGC believes that comprehensive reform and tax certainty will have the best possible impact on the economy and the construction industry.

For more information, contact Karen Lapsevic at lapsevick@agc.org or (202)547-4733.

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Spending
 

The Budget Control Act established new spending caps ($1.045 trillion) that established the allocations in which the House and Senate Appropriations Committees drafted their fiscal year 2012 funding bills.  To date, Congress has only passed 3 of 12 FY 2012 appropriations bills and the federal government is currently operating under a continuing resolution that expires on Dec. 16.   It is likely that the remaining appropriations bills will become part of one large legislative vehicle that will also include any must pass legislation.  The appropriations bills that have passed thus far are the Transportation/Housing and Urban, Commerce/Justice/Science, and Agriculture bills.  In the aggregate construction accounts included in these bills saw a net decrease from FY 2011 to FY 2012.  Specifically construction accounts for the Department of Agriculture including Rural Utilities Service, Conservation Stewardship, and Environmental Quality Incentives decreased by $151.2 million, the Commerce/Justice/Science bill  decreased construction funding including National Atmospheric and Oceanic Administration and the Economic Development Administration, by $189.1 million, and the Transportation/HUD bill cuts construction for programs including the Federal-aid Highway Program and the FAA Airport Improvement Program by $525.8 million.  

The failure of the super committee to act continues to leave major infrastructure legislation in limbo.  AGC pushed the committee to identify a long-term funding solution to adequately fund a multi-year surface transportation reauthorization and the reauthorization of State Revolving Loan Funds for clean and safe drinking water.   The surface transportation authorization bill has made some progress in the past several weeks.  The Senate Environment and Public Works Committee (EPW) passed their 2-year highway bill out of committee and the Senate Finance Committee is working to find the revenue necessary to pay for the EPW bill.  In the House, Speaker John Boehner (R-OH) announced a plan to move a 5-year transportation bill before the end of the year paid for through increased energy exploration and other to be announced measures.  In addition to reauthorizing the State Revolving Loan Funds, AGC will continue to find innovative ways to fund and finance water infrastructure including lifting the volume caps on Private Activity Bonds, increased use of Public Private Partnerships, and the creation of a Clean Water Trust Fund. 

For more information, contact Sean O’Neill at oneills@agc.org or (202)547-8892.

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Schedule for 2011 and First Half of 2012
 

The “must-pass” legislation for 2011 is finishing the appropriations bills, finishing any tax extenders package, finalizing the Defense Authorization and continuing to move, but not likely finishing, the multiyear authorizations.

Extensions of current transportation authorizations will need to be addressed by Congress in the first quarter of 2012.  The current authorization for the Federal Aviation Administration expires on Jan.31, 2012, while the authorization of SAFETEA-LU expires on March 31, 2012.  Assuming nothing is done on these issues before the end of 2011.  Passage of these multiyear authorizations, preserving and expanding construction funding as well as comprehensive tax reform will be priorities for AGC in the first half of 2012.

For more information, contact Jeff Shoaf at shoafj@agc.or or (202)547-3350.

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3 Percent Victory
President Makes 3 Percent Withholding Repeal Law
 

Nov. 21, President Obama signed into law the 3 Percent Withholding Repeal and Job Creation Act.  The law permanently repeals the requirement that federal, state, and large local governments begin withholding 3 percent of each payment of $10,000 or more to a contractor after Dec. 31, 2012.  Today’s bill signing is the culmination of a five-year effort by AGC, chapters, members, and industry stakeholders to repeal the 2006 provision.

On Nov. 16, the U.S. House of Representatives approved the bill, clearing the measure for the President.  The bill passed by a vote of 422 to 0, and followed a 95 to 0 vote in the U.S. Senate on Nov. 10. 

During the repeal campaign, AGC chapters and thousands of AGC members heeded the call and sent letters, made phone calls, and met with their representatives and senators in their Capitol Hill offices and at home to educate Congress on why this law needed to be repealed. 

Click here for an overview of what AGC has been doing recently on repeal.

For more information, contact Karen Lapsevic at (202)547-4733 or lapsevick@agc.org. Return to Top

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