Category: Tax Policy

New Reports Measure Impact of Tax Reform on Real Estate Investment and CRE’s Impact on National, State Economies

Posted on by Trey Jackson

Tax reform enacted late last year will cause investment in nonresidential structures to increase by an average of more than $23 billion from 2019-2028, and rise nearly $10 billion this year alone, according to new projections released Monday by the Congressional Budget Office (CBO).  (The Budget and Economic Outlook: 2018 to 2028, April 9)

CBO chart: Effects of the 2017 Tax Act on Investment Through Changes in Incentives affecting Nonresidential and Residential Structures. Click to Enlarge— Page 119 of  full CBO Report

The new report isolates and analyzes the impact of recent tax reform legislation on different types of economic activity, including investment in structures. 

Tax reform’s positive impact on nonresidential investment stems from the corporate and individual rate reductions, as well as the new pass-through deduction.  Combined, these changes reduce the user cost of capital.  Cost recovery rules for structures were largely unchanged in the recent tax policy changes.

CBO projects tax reform will have a dampening effect on investment in residential housing: -$9 billion in 2018, and an average of -$13 billion annually from 2019-2028.  These numbers reflect the combined, net effect of a reduction in investment in owner-occupied housing and an increase in investment in rental housing.  Limitations on the deductibility of property taxes and mortgage interest are putting downward pressure on investment in owner-occupied housing.  Rental property investment, in contrast, benefits from the same tax reforms that affect nonresidential investment. 

As a nonpartisan arm of Congress, CBO’s annual economic and budget outlook is widely watched by the private sector for indications of how recent policy changes are affecting the overall economy.

CBO: Trillion Dollar Deficits by 2020

According to the report, borrowing to fund tax cuts and increased spending will also send deficits soaring past $1 trillion in the coming years and increase the overall debt burden to 96 percent of GDP by 2028.  (The Hill, April 9)

Under the  recent $1.3 trillion spending agreement, defense and non-defense spending will increase by nearly $300 billion over the next two years.  (Roundtable Weekly, March 23)

Although economic growth is projected by CBO to rise to 3.3 percent in 2018 – much higher than the 2.6 percent recorded last year – the estimated growth rate will decrease to 2.4 percent in 2019, followed by a drop to an average of just over 1.7 percent for the subsequent eight years of the ten-year budget period.  (The Washington Post, April 10)

Deficits are also forecast to climb dramatically.  CBO anticipates a deficit of $804 billion in 2018 (43 percent higher than it projected just last June, prior to the tax bill and spending agreement).  The amount of debt held by the public will approach 100 percent of GDP over the next ten years, an amount far greater than any period since World War II.  (CNN, April 11)

NAIOP: Building Accounts for 18.0 % of National Economic Activity in 2017

According to the   NAIOP report , combining residential and nonresidential buildings,  as well as infrastructure, the total impact of construction spending (direct, indirect and induced) – accounted for 18.0 percent of all the nation’s economic activity in 2017. 

In related news, a report recently published by the NAIOP Research Foundation shows that commercial real estate in 2017 supported 7.6 million American jobs and contributed $935.1 billion to the nation’s GDP.  (Economic Impacts of Commercial Real Estate, 2018 Edition, NAIOP)

The annual study, authored by economist Stephen S. Fuller, Ph.D, measures the contributions to GDP, salaries and wages generated, and jobs created and supported from the development and operations of commercial real estate – and includes detailed data on commercial real estate development activity in all 50 states. 

According to the study, combining residential and nonresidential buildings (warehouse/industrial, office, retail, health care, entertainment, education, public safety, religious and lodging) – as well as infrastructure for water, sewer, highways and power, the total impact of construction spending (direct, indirect and induced) — accounted for 18.0 percent of all the nation’s economic activity in 2017.

“The importance of commercial development to the U.S. economy is well established, and the industry’s growth is critical to creating new jobs, improving infrastructure, and creating places to work, shop and play,” said Thomas Bisacquino, NAIOP president and CEO.  (NAIOP news release).

CRE as a driving force of national economic growth, as well as tax reform’s impact on the industry, will be a focus of The Roundtable’s April 25, 2018 Spring Meeting, which will feature  Senate Majority Leader Mitch McConnell (R-KY) and other key policymakers.

Treasury Releases Guidance on New Business Interest Deduction Limit, but Questions for Real Estate Investment Remain

Posted on by Trey Jackson

On Monday, the Treasury Department and the Internal Revenue Service (IRS) released Notice 2018-28, which provides guidance on the new limitation on the deductibility of business interest, (Section 163(j)), enacted in the Tax Cuts and Jobs Act.

In the Feb. 21 letter the Roundtable asked Treasury to clarify     that interest on debt incurred by an owner to fund an investment in a partnership or other entity engaged in a real property trade or business, constitutes interest on debt properly allocable to that real estate business  . 

The Notice focuses on interest expense carryforwards from prior years, corporate interest deductions, and consolidated corporate groups, while leaving unresolved certain key questions for real estate investors.  Taxpayers can rely on the guidance at least until proposed regulations are issued.

In general, for taxpayers with revenue over $25 million, the Tax Cuts and Jobs Act capped the amount of business interest that a business can deduct annually to no more than 30 percent of earnings before interest, taxes, depreciation, and amortization.  The provision includes several exceptions, including an exception critical to real estate for an “electing real property trade or business.”  

Notice 2018-28 addresses a concern that partners in partnerships could effectively double-count certain interest income when calculating the limitation on partner-level borrowing.  Other highlights of the Notice include:

  • Carryforward of interest expense.  The Notice states that forthcoming regulations will allow taxpayers with disqualified interest under the old law to carry forward such interest as business interest under the new law.  Such interest could be disallowed under the new limitation in the same manner as any other business interest. 

  • Corporate business interest.  The Notice clarifies that interest paid by a C corporation is business interest for purposes of the interest limit.  Forthcoming regulations will address whether and when interest paid by a partnership, including a partnership with a corporate partner, should be treated as business interest for the corporate partner. 

  • Consolidated groups.  The Notice confirms that the business interest limit properly applies at the level of a consolidated group.  Forthcoming regulations will address how the interest limit applies to a consolidated group when one of the members is an electing real property trade or business, and to a consolidated group in which a member holds an interest in a partnership that is engaged in a real property trade or business.

  • Earnings and profits.  The Notice clarifies that a disallowed business interest deduction will not affect whether or when the interest expense reduces a C corporation’s earnings and profits.

For real estate investors, however, the Notice leaves unanswered some of the key issues related to the financing of real estate.  For example, The Real Estate Roundtable has asked Treasury to clarify that interest on debt incurred by an owner to fund an investment in a partnership or other entity engaged in a real property trade or business, constitutes interest on debt properly allocable to that real estate business (Comment Letter, Feb 23; Roundtable Weekly, Feb. 23).

The Treasury Department and the IRS are expected to issue additional guidance and regulations in the future, and request comments on the rules described in the notice and what additional guidance should be issued to assist in computing the business interest expense limitation under Section 163(j). (IRS, April 2)

Depending on the outcome of the rule-making process, the new limitation on business interest expense (Section 163(j)) could have significant implications for real estate markets and the financing of real estate transactions.  Clarifying the rules for real estate in the context of tiered arrangements will help avoid potential disruptions.

The Roundtable and TPAC will continue to play an active role in seeking appropriate clarifications affecting the most significant changes to the tax code.

Real Estate Industry Urges Supreme Court to Expand States’ Authority to Collect Taxes on E-Commerce Purchases

Posted on by Trey Jackson

The Roundtable joined an industry coalition in filing an amicus curiae brief on March 5 with the U.S. Supreme Court in South Dakota v. Wayfair, Inc., No. 17-494 – a case that addresses the constitutionality of states’ authority to collect sales and use taxes on Internet consumer purchases. (SCOTUSblog)  

  The Roundtable joined an industry coalition in filing an amicus curiae brief  on March 5 with the U.S. Supreme Court in South Dakota v. Wayfair, Inc., No. 17-494  – a case that addresses the constitutionality of states’ authority to collect sales and use taxes on Internet consumer purchases.

After the high Court accepted Wayfair in January, the case has become the long-awaited judicial vehicle that may level the playing field between Internet-based retailers and “brick and mortar” stores.  The industry amicus brief, drafted by former U.S. Solicitor General Seth Waxman and his colleague Ari Holtzblatt, urges the Supreme Court to overturn a pair of decades-old decisions (e.g., Quill Corp. v. North Dakota (1992) and National Bellas Hess, Inc. v. Department of Revenue of Illinois (1967).  Wayfair directly challenges these pre-Internet opinions, which prohibit states from imposing tax collection obligations on web-based, catalog, and other retailers that lack an in-state physical presence.

In today’s e-commerce driven world, the brief notes, the law should focus on retailers’ economic rather than physical presence, and level the playing field for all retailers who have in-state sales above a certain threshold.

The brief explains how the outmoded court decisions continue to have damaging effects that reach far beyond actual brick-and-mortar outlets. “First, the loss of physical stores, many of which are integral to the social fabric of their communities, increases unemployment and creates a sense of dislocation among community residents. Second, the decline in the retail sector reduces the value of retail real estate, discourages further development of retail properties, and impedes innovation in the retail sector. Third, the lost revenue from sales, property, and income taxes threatens the ability of state and local governments to provide much-needed public services, including those that benefit online retailers,” the brief states.

The Roundtable joined The International Council of Shopping Centers, Investment Program Association, Nareit®, the National Association of REALTORS® , the National Multifamily Housing Council, NAIOP, the American Farm Bureau Federation and the South Dakota Farm Bureau Federation on the amicus brief, which re-iterates many points set forth by a real estate coalition in an initialamicus  brief filed last November. (Roundtable Weekly, Nov. 3, 2017)

Trump Administration Solicitor General Noel Francisco also joined the wave of other submissions to SCOTUS on March 5.  The Justice Department brief states, “In light of internet retailers’ pervasive and continuous virtual presence in the states where their websites are accessible, the states have ample authority to require those retailers to collect state sales taxes owed by their customers.”  (Amicus brief of USA and Wall Street Journal, March 5)

SCOTUS is scheduled to hear oral argument on April 17 and is expected to render a decision by the end of June. (Roundtable Weekly, Jan. 12)

Roundtable Proposes Framework for Implementing the Real Estate Exception to the New Business Interest Deduction Limit

Posted on by Trey Jackson

The Real Estate Roundtable on Wednesday wrote to Treasury Secretary Steven Mnuchin regarding the new limitation on business interest deductibility created in the Tax Cuts and Jobs Act, including rules that allow taxpayers to continue fully deducting interest related to commercial real estate debt. (Roundtable letter, Feb. 21)

The Feb. 21 Roundtable letter urges that Treasury clarify that interest (other than investment interest) on debt that is allocable to an owner of an entity engaged in a real property trade or business is exempt from the new business interest limitation rule – if that trade or business has elected out of the rule.

The exception for interest allocable to a real property trade or business reflects policymakers’ understanding that limits on the deduction for interest expense could have enormous negative consequences for property values, real estate markets, and economic growth.  (Reference: Real Estate Forum, Jan/Feb 2018, Decoding The New Tax Bill)

The Feb. 21 comment letter requests clarification to ensure the real estate exception operates as intended for common real estate ownership arrangements – focusing on the scope and application of the exception for an electing real property trade or business. 

The letter urges that Treasury clarify that interest (other than investment interest) on debt that is allocable to an owner of an entity engaged in a real property trade or business is exempt from the new business interest limitation rule – if that trade or business has elected out of the rule.  

As relevant examples, the letter describes four common scenarios where the financing of a real property trade or business occurs through a tiered structure.  The letter demonstrates why treating the interest expense of an upper-tier entity as properly allocable to the real property trade or business of a lower-tier entity is consistent with the legislative intent and conforms with existing tax rules and principles.  

The letter also addresses the allocation of indebtedness within entities, requesting that Treasury guidance apply the tracing rules found in existing authorities, which are already used for purposes of the passive loss rules.  

During a Feb. 20 tax conference, both Treasury’s Deputy Tax Legislative Counsel Krishna Vallabhaneni and Deputy Assistant Secretary for Tax Policy Dana Trier said a notice on language limiting interest expenses under the new tax law will be issued soon. (Bloomberg Law, Feb. 20).  

This week’s letter is a follow-up to a Jan. 18 Roundtable letter, which identified several areas where Treasury rulemaking would reduce uncertainty and facilitate continued investment. [Roundtable Weekly, Jan. 19]   

As Treasury and Congress continue to focus on implementation and technical corrections to the new tax law, The Roundtable and TPAC will play an active role in seeking appropriate clarifications affecting the most significant changes to the tax code in more than three decades.

Mnuchin: President Supports Sales Tax for Online Purchases; GAO Study Shows States Losing Billions from Tax-Free Sales

Posted on by Trey Jackson

As expectations grow that the Supreme Court will rule on the issue of state and local taxation of internet purchases by this summer, Treasury Secretary Steven Mnuchin recently testified before two congressional committees about President Trump’s support for an online sales tax.

Treasury Secretary Steven Mnuchin recently testified before two congressional committees about President Trump’s support for an online sales tax.

During a hearing before the Senate Banking Committee, Mnuchin addressed taxing online purchases through the Marketplace Fairness Act, stating: “[T]he president fundamentally supports the idea of some type of sales tax across the board … There are aspects of that he likes a lot and he looks forward to working with you and others on it.” (Video of Exchange with Sen. Jon Tester (D-MT), C-Span, Jan. 30) 

At a Feb. 15 House Ways and Means Committee hearing, Mnuchin said the president “does feel strongly” that the U.S. should impose a sales tax on purchases made over the Internet. (Bloomberg, Feb. 15)

The U.S. Government Accountability Office (GAO) released a study in December estimating that state and local governments could have collected an estimated 8 to 13 billion dollars in 2017 if states were given authority to require sales tax collection from all remote sellers. (GAO report, Dec. 18, 2017).  The Roundtable has recommended that sales taxes collected from on-line consumer purchases may provide a reliable source of state and local revenue to help pay for President Trump’s recently proposed infrastructure re-building plan.  (Roundtable Weekly, Jan. 26, 2011.)

The Supreme Court is scheduled to hear oral argument in South Dakota v. Wayfair, Inc., on April 17 to resolve the constitutionality of collecting sales and use taxes that are due on Internet purchases.  The high court is expected to render a decision by the end of June. (Roundtable Weekly, Jan. 12)

The International Council of Shopping Centers, Investment Program Association, Nareit®, and the National Association of REALTORS® will join The Roundtable on an amicus brief to be filed early next month in Wayfair, urging the Supreme Court to overturn a pair of decades-old opinions prohibiting states from imposing sales and use tax collection obligations on web-based, catalog, and other retailers lacking an in-state physical presence.  The upcoming brief will re-iterate many of the points that the real estate coalition set forth in an initial amicus brief filed last November  (Roundtable Weekly, Nov. 3, 2017.)

Policymakers Pledge to Issue Technical Corrections and Guidance to Implement New Tax Law

Posted on by Trey Jackson

Treasury Secretary Steven Mnuchin testified before Senate and House tax-writers this week about implementation of the new tax law – including needed corrections affecting carried interest limitations and a drafting mistake that subjects qualified property improvements to a 39-year recovery period, rather than 15 years.

Secretary Mnuchin testified on tax issues before the Senate Finance Committee on Feb. 14, followed by his appearance before the House Ways and Means Committee on Feb. 15.

Ways and Means Chairman Kevin Brady (R-TX) pledged during a Feb 15 hearing to address errors included in the Tax Cuts and Jobs Act (P.L. 115-97).  Brady stated, “We know that certain parts of this provision are having unintended consequences” and that he was “committed to working with our Ways and Means Members, with Senator Hatch and the Senate Finance Committee, and the Administration and stakeholders to develop the right solution now – one that is thoughtful, carefully crafted, and successful  restoring balanced competition in the marketplace.”  (Brady’s Opening Statement, Feb. 15) 

[Earlier that day, Brady invited input from stakeholders on potential problems and unintended consequences arising from the new tax law. “We expect to develop a punch list of provisions that need to be addressed either administratively or through changes in the code itself,” he said.  (BNA, Feb. 15)] 

During the House hearing, Rep. Jim Renacci (R-OH) explained to Secretary Mnuchin that Ways and Means members are working on a tax reform drafting mistake that should have provided for a 15-year recovery cost-recovery period to qualified property improvements, instead of the 39 year period that was enacted.   

Mnuchin responded to Renacci: “I am aware of the error and it obviously was unintended. We are looking at whether there is anything we can do with regulations. I think it is likely that this is something that may need to be fixed in the bill. We look forward to working with you.” (Ways and Means Committee, Mnuchin’s testimony and hearing video) 

If a focused corrections bill cannot be quickly passed by Congress, policymakers are considering adding a corrections provision to a must-pass spending bill to keep the government funded beyond by March 23.  (Bloomberg Law, Feb. 13) 

Mnunchin also testified during a Feb 14 Senate Finance Committee hearing that Treasury will issue guidance this month regarding new tax laws affecting carried interest. Under the new tax law, investment fund managers and others qualify for carried interest tax treatment after holding assets for three years, instead of one year.  Yet the new law doesn’t apply to S corporations’ carried interest profits. (The Hill, Feb. 14) 

“We will be putting out guidance and regulations to make sure that people can’t abuse the pass-throughs,” Mnuchin testified. “The IRS and [Treasury office of] tax policy intends to send out within the next two weeks guidance that we do believe that taxpayers will not be able to get that loophole by going through [S corporations],” he added.  (Bloomberg, and CQ, Feb. 14) 

In January, The Roundtable wrote to Treasury Secretary Mnuchin  offering several suggestions aimed at ensuring the long-term success of the Tax Cuts and Jobs Act (TCJA).  [Roundtable Letter, Jan. 18]

U.S. Supreme Court to Address Marketplace Fairness Issue; Decision Expected by July Regarding Sales Tax Collection on E-Commerce Purchases

Posted on by Trey Jackson

The Supreme Court of the United States (SCOTUS) today agreed to address an issue that has long vexed the retail real estate sector, and deprived states and localities of much-needed tax revenue for infrastructure development and other community needs. The nation’s highest court “granted cert” in South Dakota v. Wayfair, Inc., to resolve the lingering debate over the constitutionality of collecting sales and use taxes that are due on consumer purchases made over the Internet.

  

South Dakota v. Wayfair, Inc.  is the latest judicial vehicle to seek a ruling from the nation’s highest Court to resolve the lingering debate over Internet sales tax collection. The International Council of Shopping Centers, Investment Program Association, Nareit®, and the National Association of REALTORS® joined a November, 2017   amicusbrief ,  above, with The Roundtable.

In Wayfair, the Justices are expected to squarely resolve whether an antiquated legal doctrine known as the “physical presence” test should be overruled.  This test exempts on-line sellers from collecting sales and use taxes under the U.S. Constitution’s Commerce Clause unless they have an actual, physical retail outlet or other footprint in the state where the purchase is made – thus imposing sales tax collection burdens primarily on traditional brick-and-mortar” stores.

A coalition of real estate groups (including The Real Estate Roundtable) filed an amicus curiae brief with SCOTUS last November, urging the Justices to accept the Wayfair case to challenge pre-Internet decisions from 1991 and 1967 (Quill Corp. v. North Dakota, 504 U.S. 298, and National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753, respectively). .  (See Roundtable Weekly, Nov. 3, 2017.)  This pair of decades-old opinions prohibits states from imposing sales and use tax collection obligations on web-based, catalog, and other retailers lacking an in-state “physical presence.”

“The direct harm that the [physical presence] rule inflicts on brick-and-mortar retail stores in considerable,” the real estate groups wrote in their brief.  “Local businesses struggle and increasingly fail to compete against online retailers that can offer customers identical goods for what is in effect up to a 10 percent discount.”

The amicus brief explains the “cascading effects” that call for the Supreme Court to revisit Quill and Bellas Hess.  Many brick-and-mortar stores “are integral to the social fabric of their communities,” and losing them because Internet retailers have a competitive tax collection advantage “increases unemployment and creates a sense of dislocation among community residents.” 

The outdated “physical presence” rule also causes “lost revenue from sales, property and income taxes” which “threatens the ability of state and local governments to provide much-needed public services” to their communities, the brief maintains.  Research data from The National Conference of State Legislatures and International Council of Shopping Centers shows that nearly 26 billion dollars in state and local sales taxes from online sales went uncollected in 2015.  (NCSL and ICSC, March 2017)

The Supreme Court is likely to hear oral argument in April and render a decision by the end of June.

Now that the case moves to the merits phase, a number of advocacy groups are expected to filed a second round of briefs urging a more modern, national standard from SCOTUS to reflect the purchasing preferences and habits of consumers this century.  (See SCOTUSblog’s Wayfair page.)  Since the 1992 Quill opinion, technological advances are now available to address the complexity of administering an online sales tax.  Amazon, for example, collects and remits sales tax  for consumer transactions in 45 states and the District of Columbia.

With today’s cert grant, additional briefing on the Internet sales tax issue is expected throughout the winter and early spring.  The high Court is likely to hear oral argument in April and render a decision by the end of June, when it traditionally breaks for the summer.   

The International Council of Shopping Centers, Investment Program Association, Nareit®, and the National Association of REALTORS® joined last November’s amicus brief  with The Roundtable. 

Passage of Tax Legislation Will Boost Capital Investment and Job Creation

Posted on by Trey Jackson

Taxation of Commercial Real Estate Development and Ownership
Will Continue on Economic Basis


(WASHINGTON, D.C.) – Real Estate Roundtable President and Chief Executive Officer Jeffrey DeBoer today applauded congressional policymakers on passage of the most significant tax legislation in more than three decades (H.R. 1).  DeBoer stated:

“By reducing barriers to private sector capital formation and business investment, the tax overhaul legislation passed by the House and Senate this week will boost economic demand and job growth.

As this landmark tax bill heads to President Trump for his signature, The Real Estate Roundtable recognizes the diligent efforts of policymakers on Capitol Hill and in the White House to see this legislation through to the finish line.

Enactment of the bill will ensure that U.S. commercial real estate development and ownership will continue to be in line with the  underlying economics of real estate assets and transactions, thereby avoiding economic distortions. 

By strengthening the overall economy and spurring broad-based growth, this tax bill will allow commercial real estate to continue its role as a principal driver of economic growth and job creation.  The legislation will also allow our industry to put more people to work modernizing and improving existing properties such as office buildings, shopping centers, apartments and industrial properties. These investments will in turn support the industry’s efforts to meet the changing and growing needs of American businesses and consumers.

H.R. 1 also decreases the tax burden on all job-creating business entities, not only C corporations.  By promoting entrepreneurship and productive risk-taking at all business levels, these legislative changes will help accelerate economic growth, lift wages and create jobs.

The Roundtable plans to monitor the economic consequences of this historic tax legislation and provide industry metrics to relevant government agencies as they draft interpretative regulations in 2018.”

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House Passage of Tax Reform First Step to Encouraging Greater Job Creation and Economic Growth

Posted on by Trey Jackson

(WASHINGTON, D.C.) – Real Estate Roundtable President and Chief Executive Officer Jeffrey DeBoer released the following statement on the Tax Cuts and Jobs Act passed today by the U.S. House of Representatives.

“The Real Estate Roundtable strongly supports the House of Representatives’ effort to kick-start economic growth and job creation through the Tax Cuts and Jobs Act.  Today, outdated and overly complicated tax laws are a drag on the broader U.S. economy.  By reducing barriers to private sector capital formation and business investment, tax reforms in the House bill would boost economic demand and job growth.

The Tax Cuts and Jobs Act would reduce the tax burden on all job-creating businesses.  By spurring the overall economy, the legislation would allow the commercial real estate industry to put more people to work modernizing and improving existing properties — office buildings, shopping centers, apartments, industrial properties — to meet the changing and growing needs of American businesses and consumers.

The Act would also ensure that real estate continues to be taxed on an economic basis — avoiding excessive incentives or disincentives that distort markets and economic activity. 

By creating a new 25 percent tax rate for the owners of pass-through businesses — partnerships, LLCs, S corporations, and REITs — the Act would lower the cost of capital and stimulate entrepreneurial activity and business expansion.  Today, pass-through businesses earn over 60 percent of business income in the economy, and over the last 25 years, they are responsible for more than 60 percent of net new jobs in the country.

The reduced pass-through tax rate, as structured in the House legislation, is a powerful provision that should serve as a cornerstone of the final tax bill.” 

As the Senate debate on its own tax reform legislation proceeds, The Roundtable will continue to work with policymakers in anticipation of a final tax reform bill that strengthens the American economy, jobs and future investment.

 

Real Estate Roundtable Testifies Before Senate on Business Tax Reform

Posted on by Trey Jackson

Rational Taxation of Real Estate Urged to Spur Job Creation, Encourage Business Expansion and Contribute to GDP Growth

WASHINGTON, DC — Real Estate Roundtable President and Chief Executive Officer Jeffrey DeBoer today testified before the U.S. Senate Finance Committee, encouraging modest changes to the current taxation of commercial real estate that would continue to encourage economic growth while cautioning policymakers on specific business tax reform concepts that could cause severe market dislocation.

During today’s Senate hearing on Business Tax Reform, DeBoer testified, “Importantly, commercial real estate markets are largely in balance with supply, only modestly exceeding demand.  Despite our industry’s relative positive health, we know the underlying economy can and should grow more rapidly.”  DeBoer added that The Roundtable is concerned that some concepts under discussion in tax reform are risky, untested and have the potential to cause severe dislocation – not only in real estate markets but in the nations’ capital markets as well.

In his written testimony and his oral statement, The Real Estate Roundtable’s President and CEO addressed specific elements of potential tax reform.  (See Senate Finance Committee webcast and documents at https://www.finance.senate.gov/hearings/business-tax-reform.) Below is a summary of policy issues covered in his testimony:

  • Business interest deduction.  DeBoer noted that interest, the cost of borrowing, is an ordinary and necessary business expense that has always been deductible.  Today, U.S. capital markets are the deepest in the world, but restrictions would deter business formation and expansion.  The impact would fall disproportionately on entrepreneurs and other developers likely to serve small and medium-sized markets.  As interest rates rise, the harm to the economy will grow.
  • Cost recovery / expensing.  Current cost recovery rules need reform, but 100 percent expensing of real estate is a risky and untested proposal.  Accelerated depreciation of real estate in the early 1980s led to tax-driven, uneconomic investment.  Tax rules should reflect the economic life of structures.  Leading research by MIT suggests existing depreciation schedules for real estate are too long.  Shortening depreciation to 20 years would spur sustainable and economically sound investment.   

     

  • Pass-through reform.  U.S. pass-through tax rules create a dynamic, flexible business environment that supports entrepreneurship and productive investment.  Tax reform should provide equitable relief for pass-throughs.  A new, reduced tax rate for pass-through business income should avoid “cliffs”, phase-outs, and carve-outs that discriminate against certain taxpayers and create new economic distortions.    

     

  • Capital gains.  The tax code should encourage entrepreneurial activity and risk-taking through low capital gains rates and continue to recognize that risk can involve more than the contribution of capital.  Reform should also preserve like-kind exchanges, which get properties into the hands of new owners with the time and resources to invest in job-creating property improvements.

     

  • State and local tax deduction.  Tax reform should retain the deductibility of state and local taxes.  Eliminating the state and local tax deduction would undercut the principal source of financing for schools, roads, law enforcement, and other needed infrastructure and public services.

     

  • FIRPTA.  Tax reform should boost job growth and domestic investment by repealing outdated tax barriers to foreign investment in U.S. real estate and infrastructure.

     

  • Infrastructure.  An infrastructure initiative in tax reform is needed to create jobs, reflect the changing transportation needs of Americans and increase productivity, all to benefit the GDP.  

In his testimony, DeBoer said that although tax reform should unleash entrepreneurship, capital formation, and job creation – Congress should also undertake reform with caution, given the potential for economic dislocation and unintended consequences. 

As an example of over-reactive government policies, DeBoer noted past tax reform efforts in 1981 and 1986, which combined, created severe dislocation in real estate markets nationwide; led to job losses and bankruptcies; and contributed to the demise of the savings and loan industry.

The Roundtable’s President and CEO also addressed the federal deduction for state and local property and income taxes. “Ending the federal deduction for state and local property and income taxes could potentially cause significant issues in our nation’s cities, as some businesses relocate for no reason other than taxes. We urge that this idea be rejected,” DeBoer said.

He also testified about the crucial need to preserve interest deductibility.  “Eliminating or limiting the deduction for interest on business debt would cause great dislocation in capital markets, slow economic activity and lessen the unique importance of America’s capital markets,” DeBoer said.

After noting that commercial real estate markets today are estimated to account for nearly 20 percent of America’s GDP and employ millions of Americans, he added that real estate provides local governments with its largest revenue source and plays a key role in the retirement savings and wealth creation of Americans.  “Properly designed tax reform can spur job creation, encourage more robust business expansion and result in a sustainable increase in GDP,” DeBoer testified.  

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