TAX REFORM - September 22, 2017 - Roundtable Weekly

Roundtable’s DeBoer Testifies on Business Tax Reform Before Senate Finance Commmittee  

Real Estate Roundtable President and Chief Executive Officer Jeffrey DeBoer testified Tuesday before the U.S. Senate Finance Committee on a variety of business tax reform issues of crucial importance to commercial real estate.

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Watch video clips of Roundtable President and CEO Jeffrey DeBoer's opening statement and Q&A with members of the Senate Finance Committee on business tax reform.

Senate Finance Committee Chairman Orrin Hatch (R-UT) reiterated during the hearing that the committee’s work on tax reform would not be dictated by the highly-anticipated release next week of a tax reform framework by the “Big Six” – a group of Administration and congressional Republican negotiators, which includes Hatch.  (Roundtable Weekly, Sept. 15)

During the hearing, DeBoer emphasized in his written testimony and his oral statement that although tax reform should unleash entrepreneurship, capital formation, and job creation – Congress should proceed with caution, given the potential for economic dislocation and unintended consequences.  “Properly designed tax reform can spur job creation, encourage more robust business expansion and result in a sustainable increase in GDP,” DeBoer said.  (Download the Senate Finance Committee documents and view the entire hearing on C-Span.)

Watch video clips of DeBoer's opening statement and Q&A with members of the Senate Finance Committee.  DeBoer addressed specific elements of potential tax reform, including:

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 should also reflect the changing transportation needs of Americans that would create jobs and increase productivity for workers and businesses. 

As the fate of several tax issues critical to real estate remains uncertain, DeBoer noted that "Real estate investment should be demand-driven, not tax-driven.  We should avoid policies that create a sugar high that is fleeting and potentially damaging to our future economic health."  (CoStar, Sept 21, CRE Industry's Favored Tax Code Treatments Facing Uncertain Future in Congress)

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Sen. John Thune (R-SD) asked DeBoer about an MIT study commissioned by The Roundtable on economic depreciation. 

Responding to a question by Chairman Hatch about limitations on the deductibility of interest expense, DeBoer stated: “The use of debt is very, very important for all businesses, not just startup businesses and not just small businesses, but all businesses need this kind of flexibility to use debt. Debt by the way, allows entrepreneurs to retain more control over their businesses operation, if they have equity they give up control of some of their business. They retain more control of their business operation by using debt. It’s something that historically has been recognized as a cost of doing business, like other costs of doing business, and we really see no reason to adjust it through the tax code.”

DeBoer also addressed the federal deduction for state and local property and income taxes, testifying: “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.”

Sen. John Thune (R-SD) asked DeBoer about the MIT study commissioned by The Roundtable that suggests current recovery periods for commercial real estate are out of sync with economic depreciation.  Thune asked whether shortening the recovery period would be a reasonable alternative to immediate expensing.  “We strongly believe that,” said DeBoer.  “As MIT has studied, real estate’s proper economic life is closer to 20 years than 39 or 27 ½ years.”

“I don’t think anyone here would want to move into an apartment or work in an office that hasn’t been rehabbed and updated for 30 or 40 years,” DeBoer continued.  “So that's what this depreciation is about. It's both physical wear and tear and economic obsolescence.”

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Senate Finance Committee Chairman Orrin Hatch (R-UT), right, with DeBoer. 

The Sept. 19 hearing included three other witnesses: Scott Hodge from the Tax Foundation; Donald Marron on behalf of the Tax Policy Center; and Troy Lewis from the American Institute of CPAs. 

Previous Senate Finance Committee hearings on tax reform in the current Congress featured Treasury Secretary Steven Mnuchin (Roundtable Weekly, May 26) and the former Assistant Secretaries of Treasury for Tax Policy (Roundtable Weekly, July 21).  In June, The Real Estate Roundtable and 21 other national real estate organizations detailed their concerns in formal comments about tax reform and commercial real estate to the House Ways and Means Committee.

The prospects for tax reform this year and beyond, along with what specific policies may be under consideration, will be a major topic at The Roundtable’s Oct. 3 Fall Roundtable Meeting in Washington, DC.  Featured speakers will include Senate Finance Committee Member Benjamin Cardin (D-MD) and House Ways and Means Committee Member Peter Roskam (R-IL).

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