The tax breaks that fill the $858-billion Middle Class Tax Relief Act will provide welcome benefits for construction workers, some small firms, family-owned businesses and companies mulling equipment purchases, says Engineering News-Record.
But the key question for the still-struggling construction industry is whether the measure’s incentives, including an extension of 2001 and 2003 tax-rate reductions, will hoist the economy enough to get more projects under way. If that “trickle up” effect does come to pass, it could give construction markets a boost, but probably not a sharp spike and probably not right away.
Nevertheless, industry economists and financial experts see the legislation, which President Obama signed into law on Dec. 17, as good news. Robert A. Murray, McGraw-Hill Construction’s vice president for economic affairs, says, “The extension of the federal tax cuts is a near-term positive, which should help the fragile U.S. economy gain traction during 2011.” Murray predicts that the legislation, partly by stimulating consumer spending, could increase U.S. gross domestic product in 2011 by as much as a full percentage point, to 3.5% from 2.5%.
Ken Simonson, chief economist for the Associated General Contractors of America, says, “Any bill that is putting $850 billion back into private hands is going to have an influence on construction.” The new law does not pump money into specific types of public works, he says.
“It’s much more an attempt at private-sector stimulus,” Simonson says. “By keeping hands off the specific categories of investment, hopefully you make the economy more efficient and make it grow faster, which is good for construction over the long and even the medium haul.”
“For most businesses, the Tax Relief Act may sound like more of the same,” says David Sullivan, partner at DiCicco Gulman & Co., a Boston accounting and consulting firm with a large architect and design firm practice. “But what it does do is eliminate some uncertainty for two more years, which could be the window for growth the A&E industry desperately needs.”
Murray says that growth could prompt companies to increase spending and hiring, which in turn should lead to a pickup in demand for home buying and also reduce commercial real estate vacancy rates. Commercial real estate may not benefit during 2011, he says, “but commercial construction [could] register moderate gains by 2012.”
The positive impact should come more quickly for individual construction workers and for small firms organized as partnerships or S Corporations, which are taxed at individual, not corporate, rates. They will benefit from the two-year extensions for current individual tax rates and rates on capital gains and dividends. All of those rates were slated to expire on Dec. 31.
“The tax bill is essentially all good news for the typical family or employee owned firm. Since the vast majority of the firms pass their income fee obligation through to the owners (Sub S, LLC, LLP, etc.) then income tax rates did not go up,” says Hugh L. Rice, investment banking chairman with construction financial consultant FMI, Denver. “That means more capital in the business to pay salaries, grow or survive.”
Other two-year provisions include protection for many taxpayers from the alternative minimum tax and, for family-owned businesses, favorable tax treatment for estates. The major new element is a one-year cut in workers’ Social Security payroll taxes, to 4.2% from 6.2%.
The law also exempts estates valued at up to $5 million from the federal inheritance tax and sets the rate at 35% above that amount. The old exemption would have been $1 million, the marginal rate 55%. Robert Dietz, the National Association of Home Builders’ assistant vice president for tax and policy issues, says his group would have preferred estate-tax repeal but says the new exemption and rate are “certainly a step in the right direction.”
Also on the plus side are depreciation breaks, including a provision that lets companies write off capital goods in the year they were purchased. Small companies get an extension of the Section 179 write-off, though the maximum they can “expense,” starting in 2012, is $125,000, down from $500,000 in 2011.
Groups such as the Solar Energy Industries Association were pleased to see a one-year continuation for grants for renewable-energy projects. Those grants are in lieu of tax credits to companies who lack income to benefit from a credit.
Still, construction industry officials were disappointed that the bill didn’t extend Build America Bonds. The program, which has helped finance public-works projects since April 2009, will expire on Dec. 31. Read More