Author: Cole Kline

As congressional Republicans weigh their budget options and consider competing plans from both the House and Senate, their search for revenue offsets has included proposals to restrict the deduction for state and local taxes (SALT) on businesses and raise the tax rate on carried interest. 

Business SALT

• Prior to the markup of its budget resolution, the House Budget Committee floated a menu of potential revenue offsets for reconciliation legislation, including a proposal to “eliminate the business SALT deduction.” (New York Times, Jan. 28)
  
  

• Depending on how broadly the business SALT limitation is designed, it could include repealing the deductibility of state and local property taxes paid by commercial real estate owners.  Hill discussions on business SALT have intensified in recent weeks.  (Bloomberg, Feb. 18)
   
  

• “Eliminating the business deduction for property taxes would be the equivalent of raising business owners’ property tax bills by roughly 40 percent.  Employers would owe federal tax on money that they do not have.  It would lead to insolvencies and foreclosures. It would cause self-inflicted injury to the U.S. economy, including unnecessary job losses, higher rents for families and individuals, and other inflationary pressures.  It is a recipe for a recession,” said Jeffrey DeBoer, President and CEO of The Real Estate Roundtable.
  
  

• The idea of limiting business SALT has support from several outside organizations and, according to Politico, was initially floated by members of the House Freedom Caucus.  (Politico, Jan. 15)
  
  

• “Business taxes are fundamentally different from state and local individual income taxes.  State and local business taxes are an unavoidable expense, an inescapable cost of doing business,” noted DeBoer. “Property taxes alone are, on average, 40% of operating costs for real estate businesses.  In many cases, capping the deductibility of property taxes would require businesses to pay income tax when their actual income and cash flow is negative.”
  
  
• The Roundtable is working, alongside its real estate trade association partners, to raise awareness among policymakers of the risk and harm that a cap on business SALT poses for the industry and the broader economy.  
  

Carried Interest

• President Trump’s recent call on Congress to close the “carried interest tax deduction loophole” has put a national spotlight back on the issue of carried interest and its proper tax treatment.  (Financial Times, Feb. 6)  
  
  
• Trump’s expression of support for raising taxes on carried interest led Senators Tammy Baldwin (D-WI), Elizabeth Warren (D-MA), Bernie Sanders (I-VT) and others to reintroduce legislation, the Carried Interest Fairness Act. The bill would recharacterize all carried interest as ordinary income. (Politico, Feb. 18)
  
  
• Sen. Baldwin filed a nonbinding amendment on carried interest during the Senate budget resolution debate this week but did not offer it for a formal vote.  
  
  
• Carried interest emerged as a political issue in 2007, but remains largely misunderstood to this day. In real estate, carried interest is not compensation for services. General partners receive fees, taxed at ordinary rates, for routine services like leasing and property management. Carried interest is granted for the value the general partner adds, such as business acumen, experience, and relationships. It is also recognition for the risks the general partner takes.   
  
  
• In response to the new legislation, the Americans for Tax Reform—alongside a broad coalition of other taxpayer advocacy groups—penned a comment letter urging lawmakers to consider the negative ramifications of this policy.
  
  
• In the letter, the organizations argue that the proposal would discourage investment and reduce growth, urging Congress to oppose the bill. “The current tax treatment of carried interest is an intentional, pro-growth feature of the tax code for more than 100 years that incentivizes risk-taking and entrepreneurship, benefiting investors, public pension funds and retirees.” (Americans for Tax Reform, Feb. 19)
  
  
• The Tax Cuts and Jobs Act of 2017 extended the holding period required for carried interest income to qualify for long-term capital gains treatment from one year to three years.
  
  
• The false narrative surrounding the carried interest issue is that it targets only a handful of hedge fund billionaires and Wall Street executives. The carried interest legislation is far broader and would apply to real estate partnerships of all sizes.
  
  

• “Taxing carried interest at ordinary income rates would discourage the risk taking that drives job creation and economic growth. It would reduce economic mobility by increasing the tax burden on cash-poor entrepreneurs who want to retain an ownership interest in their business. It would have profound unintended consequences for housing affordability and main streets all across our country,” said DeBoer.
  
  

Looking Ahead

As tax negotiations develop, RER will continue to engage with congressional leaders on both sides of the aisle to inform policymakers about the real-world consequences of proposed changes to the deductibility of business SALT and tax treatment of carried interest.  

While the budget debate will move forward, it will likely be several weeks, if not months, before the tax-writing committees mark-up and vote on the actual details of their tax and revenue legislation.