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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