As Congress works to address the housing market downturn, the homebuilders have been the most aggressive lobby in pressing its case, ruffling many feathers along K Street in its advocacy.
The National Association of Home Builders, the voice for major builders that have been significantly hurt by the recent downturn, has led the effort. First, it took an unusual and controversial step to suspend its political contributions until lawmakers passed legislation to help the industry.
It then became one of the strongest advocates for a Senate tax break that would allow businesses currently in the red a greater ability to obtain refunds from previous years when they were profitable.
Under current law, business could carry back such net operating losses for only two years; the change would extend it to four years at an estimated cost of $6.1 billion over 10 years.
The provision was included in a Senate-passed housing bill, but it is now on life support after coming under fire from the right as ineffectual and the left as an unwise corporate bailout.
To make matters worse, political and legal questions remain over NAHB’s decision to stop its political giving, leaving a cloud that will likely linger long after the debate is over.
“This would be the epitome of how not to lobby proactively for a provision,” said one business lobbyist, who like others requested anonymity to be able to speak freely about the issue.
The homebuilders got the attention of Congress and K Street when it announced on Feb. 12 that it would suspend its political giving. The organization is massive, with a 120-member board representing all segments of the industry, from luxury builders to service industries.
But with one-third of its membership made up of builders facing a 10-month supply of homes in a down market, it threw down the political gauntlet.
NAHB President Brian Catalde said in a statement that “more needs to be done to jump-start housing and ensure the economy does not fall into a recession.”
Capitol Hill was cool to the ultimatum. The Senate at the time was beginning its work on a housing package, but some top leaders in the chamber believed the statement was out of line, as it raised the specter of a quid pro quo.
“These kinds of threats have no place in politics,” said Jim Manley, spokesman for Senate Majority Leader Reid.
The negative reaction among the lobbying community was swift. Some questioned why its well-regarded lobbying team, led by CEO Jerry Howard, did not exert more sway to dissuade its members from taking the bold step because of the unseemly appearance of withholding money in exchange for votes.
The association had given $833,000 in contributions so far this election cycle, with 47 percent going to Democrats and 53 percent to the GOP, according to the Center for Responsive Politics.
“I was surprised they did this. They had been such political pros. You expect maybe a fly-by-night group to do it. But they are major player in this city,” said one financial services lobbyist who has worked on Capitol Hill. “I can understand why their leaders would want to do it, but that’s the job of staff to say, ‘No, no, no guys. … You don’t want to do this.’”
In early March, Howard expressed frustration that he saw “no reaction in terms of people on the Hill willing to sit down and talk with us about the important housing policy matters.”
But the jittery housing market put pressure on lawmakers to act, forcing them to assemble a bipartisan Senate package that included the net-operating loss provision.
The homebuilders would benefit from the provision: Collectively the top 15 corporate homebuilders made $16 billion in profits in 2006, but many are facing major losses. For example, KB Home, a major builder, reported a pre-tax loss of $399 million for the fourth quarter. While the builders would reap savings, so would other industries encountering rough patches, such as banks and automakers.
But trouble was on the way even before the package hit the Senate floor. In a revealing March 6 Senate Banking Committee hearing, Sen. Bob Corker, R-Tenn., challenged Howard on the need for the tax break.
“This is going to do nothing whatsoever except shore up homebuilders that are in trouble ... but that isn’t the problem today,” Corker said. “The homebuilders are the ones who are going to benefit most from this group anyway.”
Howard acknowledged the provision would not solve a credit crunch hampering the home mortgage market, but it would help keep builders solvent and their workers employed.
“It will be difficult for many homebuilders to be able to avail themselves of stability in the credit market if they go out of business,” Howard said. “That’s how dire it is for homebuilding concerns around the country.”
Corker wasn’t swayed, noting the provision would apply to all industries even outside the housing arena. “You think that’s an important factor to solving the credit problem that we are dealing with today?” Corker asked.
“I don’t think it’s an important factor to solving the credit problem, sir. I think it’s an important factor to keep many of America’s small businesses open,” Howard replied. One lobbyist who witnessed the exchange said he thought it was “frightening” for an association head to be openly taking on a lawmaker in such a public forum.
It didn’t get any easier on the Senate floor. Defenders of the tax break were limited; most lawmakers were excited about renewable energy tax credits and a tax break for homebuyers of foreclosed homes.
Then Senate Budget ranking member Judd Gregg attempted to bring up his amendment to kill the net-operating loss provision, but was thwarted. Gregg then ripped into it, complaining the provision was almost socialist.
“What we have here is the housing industry requesting an $18 billion tax break [over the first two years] specifically for them because they created an economic meltdown by speculatively building thousands of houses, thousands more than we needed, and then selling those houses to people through the subprime mortgage process which turned out to be a very poor idea. And at the time that these housing companies did this, they made a lot of money,” Gregg said.
The bill ultimately passed April 10, even though Senate Banking Chairman Christopher Dodd said he was unenthusiastic about the provision. Its chances have been hampered in part because various segments within the housing industry are pushing for other tax provisions.
For example, the National Association of Realtors is advocating a first-time homebuyer tax credit. “We think that is the most effective,” said Jerry Giovaniello, chief lobbyist for the Realtors. The Mortgage Bankers Association supports the net-operating loss language, but it is not its top priority.
That left an opening that critics on the left exploited to demonize it as the “homebuilder tax break.”
The Laborers International Union of North America, which represents construction workers, led a campaign with other groups such as the Center for American Progress, ACORN and the Citizens for Tax Justice.
Terence O’Sullivan, LIUNA general president, said his union was surprised that a Democratic Senate would include the provision and worked to make sure that House leaders would not do the same. The union argues that KB Home would receive up to $789 million through the Senate tax break and Toll Brothers Inc., would receive as much as $774 million.
O’Sullivan said he raised the issue with House Speaker Pelosi and was assured that their concerns will be addressed.
“Somebody must have spiked the water cooler [in the Senate]. It didn’t add up and it didn’t make sense,” O’Sullivan said. “We are looking at members of ours that are facing foreclosure, members of ours that are losing their jobs in the residential construction industry. Then we are going to reward corporate homebuilders who helped create this crisis though their mortgage subsidiaries?”
They succeeded as the House housing-stimulus tax package went a different direction: focusing on a first-time homebuyer tax credit and an overhaul of the low-income housing tax credit, which has the support of builders who specialize in construction and rehabilitation of affordable housing units.
The House should vote on its bill early next month. Given their differences over the tax provisions, some lobbyists have speculated whether they can be bridged with a compromise acceptable to the White House.
“Both [tax] bills are so bad, even if they somehow get to Bush’s desk he won’t sign it,” said one tax lobbyist.
No matter how the debate turns out, the NAHB will be forced to figure out how to repair damage over its PAC decision, lobbyists said.
They noted lawmakers would be concerned that if they accepted donations from the group, they could be open to accusations that their vote was in exchange for its PAC contribution. “I’m waiting for people to raise a quid pro quo,” said another financial services lobbyist. “What did they exactly do for that campaign donation?”
Larry Noble, a campaign finance attorney with Skadden Arps, said he believes the NAHB did not doing anything criminally illegal because it did not tie its political giving to a specific piece of legislation, but rather a general statement to help the housing industry. But the appearance could pose other problems.
“It’s a matter of optics. How it looks,” Noble said. “You don’t want them to be making a connection that while it may be perfectly legal, people are going to start questioning it. I think what you are seeing here is that type of situation.”
Donna Reichle, NAHB spokeswoman, said the board will revisit its PAC stance when it meets again later this spring. Its members will be in town next week for its legislative conference.
This article appears in the April 26, 2008, edition of NJ Daily.