Issues & AdvocacyFederal

Architects Face the Fiscal Cliff
By Andrew Goldberg, Managing Director, Government Relations & Outreach

Members of Congress returned to Washington this week for a lame duck session to deal with the “fiscal cliff,” a debate that could have major ramifications for the architecture profession.

The fiscal cliff refers to a series of tax increases and spending cuts that will take place at the end of 2012 and beginning of 2013 unless Congress and President Obama work to stop them. At the end of the year, the so-called Bush 2001 and 2003 tax cuts will expire, leading to higher taxes on nearly 90 percent of U.S. taxpayers. In addition, on January 2, the first round of $1.2 trillion in budget cuts (also called sequestration) triggered by the failure of the debt super committee to come to an agreement will kick in.

According to an AIA analysis released in October, the sequestration could reduce federal spending on design and construction by more than $2 billion, with potential job losses in the industry of up to 60,000 and higher costs to taxpayers in the long run due to deferred maintenance. The magnitude of the tax increases and spending cuts and their impact on architects is why AIA president Jeffery Potter, FAIA, wrote to the President and Congress today urging them to find a solution to the fiscal cliff crisis that does not disproportionately hurt the design and construction industry.

Avoiding the Cliff is Not Easy

Although both parties say they want to avoid the fiscal cliff, there is no agreement on how to achieve that. Republicans support extending the 2001 and 2003 tax cuts for all income levels and to forestall the $600 billion in cuts to defense spending that will start in January. President Obama, meanwhile, backs letting the tax cuts expire for earners making over $250,000 per year and finding ways to delay or limit all budget cuts.

The election has not helped change the dynamic on the issue, with Democrats continuing to hold the White House and the Senate, while the GOP kept its House majority. However, both parties have expressed some level of support for a so-called “grand bargain,” a longer-term plan to deal with the budget deficit.

The day after the election, House Speaker John Boehner (R-OH) said that Congressional Republicans may be open to more tax revenue by including reform of the tax code as part of a compromise, while President Obama said at a White House press conference yesterday that he is open to cuts in entitlement programs. Although this may sound like progress, the devil will be in the details. Republicans insist that any new tax revenue come from closing as-yet unspecified loopholes and economic growth; meanwhile, Democrats are pressuring the President to insist on one dollar of tax increases for every dollar of spending cuts. In 2011 President Obama and Speaker Boehner reportedly came close to a grand bargain, but the plan fell apart when the President called for more tax increases than Speaker Boehner wanted to support (not surprisingly, each side blames the other for the breakdown).

Most observers believe that, with the clock ticking down toward the fiscal cliff, there is not enough time for the two sides to hammer out a grand bargain. Instead, there is a possibility that the sides will agree to delay the fiscal cliff for a few months to buy enough time to develop a long-term plan that includes tax reform.

Either Way, Architects Will Feel the Impact

Although such a move would prevent (at least in the short term) the impacts of the fiscal cliff on the design and construction industry, many land mines await.

For one thing, it is very possible that any deal on the budget will include cuts, some significant, on federal design and construction budgets. In addition, tax reform could have dramatic impacts on the built environment. For one thing, tax incentives for historic preservation, energy efficiency, low-income housing – and even, perhaps, the home mortgage interest deduction – could be scaled back or eliminated in order to raise more revenue.

Second, how pass-through entities like S corporations, the self-employed, and partnerships are treated is far from clear. Approximately 80 percent of architecture firms are pass-through entities; if tax reform lowers rates for C corporations but not pass-throughs, many smaller and medium-sized firms could see their tax rates go up.

The AIA and its allies in the design, construction and real estate industries are working to educate policymakers about the impacts of tax and budget changes on the built environment; in October, the AIA hosted an industry roundtable where top Republican and Democratic staff from the House and Senate tax committees shared their views and heard the industry’s views.

It is impossible to know how the lame duck session will address the fiscal cliff. The only two things that are certain is that the outcome will have an impact on design firms; and that the AIA is working to make sure that architects are at the table in the discussions.

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This content is published by the AIA Government and Community Relations Department, 1735 New York Ave., NW, Washington, DC, 20006. To contact the AIA’s Government & Community Relations team, send an email to govaffs@aia.org.