News Type: Roundtable Weekly

Shutdown Looms Over Federal Funding Debate; Roundtable Submits Requests to Treasury for Guidance on New Tax Laws

Posted on by Trey Jackson

Without a last-minute funding deal before midnight tonight, much of the federal government will shut down on the one-year anniversary of President Trump’s inauguration. The budget affects issues of importance to commercial real estate such as the National Flood Insurance and  EB-5 foreign investment programs.

In an effort to identify temporary or immediate guidance that would provide a boost to economic growth and jobs, Real Estate Roundtable President & CEO Jeffrey DeBoer yesterday 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]   

Despite White House talks today between Minority Leader Chuck Schumer (D-NY) and President Trump, disagreements on immigration policies such as the Deferred Action for Childhood Arrivals (DACA, or “Dreamers”) program threaten to scuttle a possible Senate vote on a government funding bill.  If a deal is reached, the House is prepared to act again – after passing a fourth “Continuing Resolution” (CR) in FY2018 last night, which would extend government funding through Feb. 15. 

The budget battle comes on the heels of last December’s enactment of the largest overhaul of the tax code in 31 years. As businesses and individuals adjust to the new tax law’s various provisions, it is expected that the IRS will issue guidance on technical questions affecting commercial real estate and other industries.  

In an effort to identify temporary or immediate guidance that would provide a boost to economic growth and jobs, Real Estate Roundtable President & CEO Jeffrey DeBoer yesterday 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]

The Jan. 18 Roundtable letter is based on input received from real estate leaders across the country, who share the goals of avoiding economic disruptions and reducing inefficient business restructuring or inactivity pending the issuance of final rules.  

The Roundtable letter identifies several areas where rulemaking would reduce uncertainty and  facilitate continued investment, including: 

  • the scope of the real estate exception to the new limitation on business interest deductibility;
  • the requirements that apply when calculating a taxpayer’s eligibility for the new 20% deduction for pass-through business income; and 
  • the applicable cost recovery periods under the new tax law.    

The letter describes each issue and suggests clarifications that would be useful, in the short term, to ensure the new tax law spurs investment, growth and job creation. 

In conjunction with next week’s Roundtable State of the Industry Meeting in Washington, DC, the Tax Policy Advisory Committee (TPAC) will analyze these areas in detail.  Additionally, The Roundtable’s business meeting will feature key congressional leaders, including Senate Minority Leader Schumer, who will engage attendees in a variety of policy discussions, including the current budget situation.

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. 

Congress Considering Another Continuing Resolution To Avoid Government Shutdown Next Week

Posted on by Trey Jackson

House Republicans this week said efforts on a two-year budget deal to fund government programs and agencies are progressing as the current, short-term government funding extension is set to expire on Jan. 19. 

Consensus on outstanding policy disagreements did not emerge this week, despite a bipartisan meeting at the White House on Tuesday between President Trump and congressional leaders.  (  White House video  , Jan. 9)

Congress may pass a fourth “Continuing Resolution” (CR) for FY2018 to fund the government until mid-February and buy time to address spending limits on military and nondefense programs – including immigration policies such as border security and the Deferred Action for Childhood Arrivals (DACA, or “Dreamers”) program. 

The budget affects other issues of importance to CRE such as the National Flood Insurance and  EB-5 foreign investment programs.  If an agreement among policymakers is not forged next week and another CR cannot be passed, the government will shut-down. 

House Minority Leader Nancy Pelosi (D-CA) told reporters yesterday that a negotiated solution on both spending caps and Dreamers is uncertain. “There is no point in having another CR unless we have an agreement on DACA and funding, disaster aid, a number of issues that have to be dealt with,” Pelosi said.  

House Majority Leader Kevin McCarthy (R-CA) this week said, “I believe we can get to a solution here in the next day or two so we can move forward.  If we’re able to have that budget agreement, we’ll need some time for appropriators to do their work, so we’d have a continuing resolution.” (CQ, Jan. 11) 

Consensus on outstanding policy disagreements did not emerge this week, despite a bipartisan meeting at the White House on Tuesday between President Trump and congressional leaders.  (White House video, Jan. 9)  

Other issues under discussion include the fate of a bill introduced by Senate Finance Committee Chairman Orrin Hatch (R-UT) late last year that would extend various expired energy and other temporary tax provisions. (Wall Street Journal, Dec. 21, 2017) 

A separate tax “technical corrections” bill to address gaps and inconsistencies in last year’s landmark Tax Cuts and Jobs Acts is expected this quarter.

House Ways and Means Chairman Kevin Brady (R-TX) said this week that several extenders may be included in an upcoming CR. “I think it’s important for Democrats and Republicans to really come together on a lot of key issues … I’m hopeful they all stay at the table and bring us either in one or two steps what we need to do,” Brady said. 

It is unclear whether Senate Majority Leader Mitch McConnell (R-KY), with only a slim one-vote majority in the chamber, will be able to attract enough votes to pass a budget resolution. 

A separate tax “technical corrections” bill to address gaps and inconsistencies in last year’s landmark Tax Cuts and Jobs Acts is also expected this quarter.  Republicans would need to attract Democratic votes to reach a 60-vote threshold to pass another tax measure. (Roundtable Weekly, Jan. 5) 

The Roundtable and its Tax Policy Advisory Committee will discuss these issues in detail during The Roundtable’s Jan. 24-25 State of the Industry Meeting in Washington. Among the prominent policymakers who will engage Roundtable members during the business meeting is Senate Finance Committee Ranking Member Ron Wyden (D-OR) and the Treasury Department’s Deputy Assistant Secretary for Tax Policy Dana Trier.

Roundtable Encourages Senate Banking Committee to Consider HVCRE Legislation That Would Clarify Banking Rule Affecting Acquisition, Development, or Construction Loans

Posted on by Trey Jackson

The Real Estate Roundtable on Tuesday encouraged Senate Banking Committee leadership to consider a bipartisan measure similar to one passed in the House of Representatives in November that would reform and clarify the Basel III High Volatility Commercial Real Estate (HVCRE) Rule for certain acquisition, development, or construction loans (ADC).  (Roundtable Comment Letter, Jan. 9)

The Roundtable’s letter this week to Senate Banking, Housing, and Urban Affairs Committee Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) expressed concerns about the HVCRE Rule since its effective date of January 1, 2015.

The House passed the Clarifying Commercial Real Estate Loans Act (H.R. 2148) on November 7, 2017 following a nearly unanimous vote by the House Financial Services Committee (59-1).  Since the Rule’s effective date of January 1, 2015, necessary clarification for key elements of the Rule have not been provided by regulators despite ongoing requests. Instead, the regulatory agencies proposed yet another, duplicative exposure category for ADC loans –  HVADC. 

This bipartisan legislation – introduced by House Financial Services Committee members Rep. Robert Pittenger (R-NC) and Rep. David Scott (D-GA) – would help address concerns regarding the Basel III HVCRE Rule by amending the Federal Deposit Insurance Act and clarifying requirements for certain ADC loans. Clarification of the HVCRE Rule would ensure that credit capacity and economic activity would not be impeded, while promoting economically-responsible commercial real estate lending.  (Roundtable Weekly, Nov. 10) 

The Roundtable’s letter this week to Senate Banking, Housing, and Urban Affairs Committee Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) expressed concerns about the HVCRE Rule since its effective date of January 1, 2015. 

The letter states: “The current rules are overly broad and include many stabilized loans without construction risk in this HVCRE category, unduly burdening stabilized loans with capital charges appropriate to protect banks from heightened construction risks.  Many banks, including small community financial institutions, have been deterred from making this type of loan –  which can represent up to 50 percent of a small bank loan portfolio.” 

The Roundtable also submitted comments on Dec. 21, 2017 to banking agencies in response to  their Notice of Proposed Rulemaking (NPR) – “Simplifications of and Revisions to the Capital Rule related to High Volatility Acquisition Development or Construction (HVADC) Exposures” as issued on Oct. 27. 

The Roundtable encourages the agencies to review the language in Clarifying High Volatility Commercial Real Estate Loans (H.R. 2148) and utilize such an approach to clarify the current HVCRE rules and build on this construct in a new consolidated HVCRE/HVADC rule.

Real Estate Roundtable President and Chief Executive Officer Jeffrey DeBoer commended the Senate Banking Committee for recognizing the important link between bank regulatory policy and economic growth and for taking steps to identify potential ideas that would foster job creation and economic activity.

The Roundtable comments on the NPR were submitted through its HVCRE Working Group and Real Estate Capital Policy Advisory Committee (RECPAC) to the Office of the Comptroller of the Currency; the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation.  These comments raise concerns about the creation of yet another exposure category for acquisition, development, or construction loans – High Volatility Acquisition, Development, or Construction (HVADC) – while providing no clarification for the existing High Volatility Commercial Real Estate (HVCRE) Rules.  The Roundtable and eight other national policy organizations also submitted a separate, joint letter in late December to the banking agencies about the NPR. (Roundtable Weekly, Dec. 22, 2017) 

Following these efforts late last year in the House and comments to the banking agencies, this week’s letter to the Senate Banking Committee leadership also explains how the HVCRE Rule issue is not only a problem for commercial real estate owners and bank lenders – but one for the broader economy.  Without adequate credit capacity for commercial real estate lending, jobs and tax revenue will be lost and economic growth impeded.  “As financial institutions absorb a multitude of overlapping Dodd-Frank and Basel regulations, we are concerned about the cumulative impact these rules are having on real estate credit capacity, liquidity, capital formation and job growth,” the letter states. 

Real Estate Roundtable President and Chief Executive Officer Jeffrey DeBoer also commends the Senate Banking Committee for recognizing the important link between bank regulatory policy and economic growth and for taking steps to identify potential ideas that would foster job creation and economic activity.  DeBoer concludes the letter: “We look forward to working with the Senate Banking Committee on measures such as these that will help craft a sensible financial framework for growing a healthy economy.”

Treasury’s New Partnership Audit Rules Avoid Entity-Level Tax on Real Estate Tiered Partnerships

Posted on by Trey Jackson

New partnership audit rules will allow real estate investors to continue using tiered partnership structures without the risk of a new entity-level tax on the partnership. 

Proposed Treasury regulations published on Dec. 19 end the two-year uncertainty over whether new partnership audit rules would create a significant tax liability for investors in real estate partnerships.  [  link to regulations  ]

Proposed Treasury regulations published on Dec. 19 end the two-year uncertainty over whether new partnership audit rules would create a significant tax liability for investors in real estate partnerships.  At issue was the question of whether the IRS could require partnerships to pay taxes that are appropriately owed by its individual partners.  The tax code has long recognized that partnerships are “pass-through” entities, and that partners in partnerships are only subject to tax on their share of the partnership’s income.  But under the new partnership audit reform law, some argued that the IRS could impose an entity-level tax burden in certain cases. 

The Treasury regulations clarify that tiered partnerships will be permitted to use the “push-out” method, in which a partnership is relieved of the entity-level tax after an audit as long as it timely transmits revised K-1 tax statements to its partners, including other partnerships.  [link to regulations] [IRS Guidance on Partnership Audit Regime Eases Some Concerns, Accounting Today (Dec. 26, 2017)] 

Real Estate Roundtable Tax Policy Advisory Committee (TPAC) Member Donald Susswein testified specifically on this issue on behalf of The Roundtable at a September IRS hearing.  At the hearing, Susswein stated that, “the most urgent thing is that prospective investors know that they’re only going to be subject to tax on their own tax liability, correctly determined.”  He further testified that, “In order to ensure that this new law does not create a hindrance on the economy, it is very important to reassure investors that there is going to be a push-out method for tiered partnerships.  And that can be done now, in 2017, even if other aspects of the regulations are reserved.”  [Roundtable Weekly, Sept. 22, 2017)  

Real Estate Roundtable Tax Policy Advisory Committee (TPAC) Member Donald Susswein, left, testified on behalf of The Roundtable about the new partnership audit rules at a Sept. 2017 IRS hearing.

Congress enacted new rules for auditing partnerships and collecting partnership tax adjustments in the Bipartisan Budget Act of 2015  (BBA).  An early version of the legislation would have shifted partnership tax liability to the entity level and imposed joint and several liability on individual partners and the partnership for the full amount owed.  

The Roundtable successfully argued, at the time, that entity level taxation of partnerships would disrupt capital formation and discourage business activity, ultimately hurting job creation and economic growth.  The Roundtable was heavily involved in developing the final BBA approach, which allows partnerships to “push out” tax adjustments through partnerships to the appropriate partner.  The legislation was silent, however, on how the rules would apply to tiered partnerships.  

Although enacted in late 2015, the new partnership audit rules will only take effect for audits of 2018 and later years.  The audits themselves are unlikely to start until 2019 or 2020.  Clarity on the application of the new rules for tiered partnerships is important, however, because of the impact on real estate investor decisions and partnership formations.

Trump’s State of the Union Includes Increased Infrastructure Investment Proposal; New Reports Show Debt Ceiling Will Be Reached in March

Posted on by Trey Jackson

In his State of the Union address this week, President Trump called for a bipartisan approach on infrastructure and immigration – policy issues that could define the second year of his Administration before mid-term elections in November.

In his State of the Union address this week, President Trump called for a bipartisan approach on infrastructure and immigration. 

The president’s address included a proposed 50 percent increase in infrastructure spending compared to a 1 trillion dollar goal stated earlier. (USA Today, Jan. 5). “Tonight, I am calling on the Congress to produce a bill that generates at least 1.5 trillion dollars for the new infrastructure investment we need.  Every federal dollar should be leveraged by partnering with state and local governments and, where appropriate, tapping into private sector investment, to permanently fix the infrastructure deficit,” Trump said. 

Although the president’s comments did not include details about how to fund the infrastructure initiative, he also emphasized the need to reduce the average permitting time for infrastructure projects from 10 years to two – noting that the Empire State Building was built in one year. 

Roundtable President and CEO Jeffrey DeBoer commented on the positive economic benefits that such an infrastructure program would bring to the nation. “Modernizing our roads, tunnels, mass transit, drinking water, power grid, and telecommunications systems – in rural and urban areas alike – are vitally important to economic growth, productivity and America’s global competitiveness,” DeBoer said. 

He added, “Real Estate Roundtable members are experienced in addressing the financing, permitting and government partnership issues that frequently slow or stop infrastructure projects.  We intend to provide positive feedback and ideas to all policymakers working to facilitate improvements in our nation’s infrastructure.”  (Roundtable Letter on Infrastructure Funding, Jan. 11) 

The White House said on Wednesday that it will offer Congress detailed principles on the infrastructure proposal in the coming weeks. (Bloomberg, Feb. 1).   

Roundtable President and CEO Jeffrey DeBoer noted that both infrastructure and immigration policies could create more jobs and spur higher wages. 

President Trump also made immigration a key focus of his address, proposing a four-point immigration reform and border security framework. A vote may be held next week in Congress on the Deferred Action for Childhood Arrivals (DACA, or “Dreamers”) immigration program. 

The Roundable’s DeBoer noted that both infrastructure and immigration policies could create more jobs and spur higher wages.  “Pro-growth immigration reform that honors our roots as a nation of immigrants and safeguards our nation’s security is also critically important to continue the upward trajectory of our economy,” DeBoer stated. 

Debt Ceiling  

Looming over policy debates on Capitol Hill and a Feb. 8 scheduled expiration of government funding is the nation’s debt ceiling, which will be reached in March according to reports this week from the Treasury Department and Congressional Budget Office. The debt ceiling allows the government to finance commitments that have already been made — it does not authorize new spending. 

Both reports forecast the government will be unable to meet its debt obligations in March. Treasury Secretary Steven Mnuchin on Wednesday urged congressional leaders to “act promptly” to increase the limit. (Reuters, Jan. 31).  

Congressional lawmakers are reportedly working on a fifth Continuing Resolution this fiscal year to fund the government through March 23 — it needs to pass next week to prevent another government shutdown.  (BNA, Feb. 1)

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.

 

House Tax Bill Proposals Will Boost Economic Demand and Job Growth: Real Estate Roundtable

Posted on by Trey Jackson

 Bill Reduces Barriers to Private Sector Capital Formation and Business Investment

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

“The Real Estate Roundtable commends House Speaker Paul Ryan (R-WI), House Ways and Means Committee Chairman Kevin Brady (R-TX) and their colleagues on the introduction of comprehensive tax reform legislation.  

Today, U.S. commercial real estate is taxed on an economic basis, and commercial real estate markets are generally healthy and strong.  However, outdated and overly complicated tax laws are a drag on the broader economy.  By reducing barriers to private sector capital formation and business investment, tax reforms in the House bill will boost economic demand and job growth.

The bill would reduce the tax burden on all job-creating businesses, not only C corporations.  If the final bill is similar to the one introduced today, our industry will 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

As the House bill moves on to mark-up next week in the Ways and Means Committee, and a separate tax reform bill is expected in the Senate this month, we look forward to continuing to work with Congress and the Administration to enact pro-growth tax reform.”

 

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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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