A last-minute addition to President Donald Trump’s newly enacted tax cut plan provides what critics say was a giveaway to commercial real estate investors, many of whom are wealthy and have few employees.
The tax bonanza is in the form of a 20 percent deduction on income from so-called “pass-through” businesses, which include limited liability companies (LLCs) and partnerships, common structures for real estate enterprises.
Profits from pass-through businesses are taxed as individual income rather than being subject to the corporate tax rate. Since the new tax plan lowers the corporate tax rate from 35 percent to 21 percent, Republican lawmakers touted the pass-through regime as leveling the playing field for the real estate industry.
But the law goes further to benefit the sector.
Income caps were added to ensure that only businesses that generate ample employment would qualify for the tax deduction beyond the specified thresholds. While other pass-through enterprises with few employees are barred from taking deductions above the caps, real estate owners can bypass the limits.
“This whole pass-through regime, it’s a windfall for real-estate investors,” Steve Rosenthal, senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute, told Tarbell. “Special relief” added late in the legislative process was designed and customized to meet the industry’s specific needs, he noted. The new law makes accommodations for REITs (real estate investment trusts) and allows rent to satisfy the 20 percent deduction even though other forms of “passive income” don’t qualify.
The costs to the U.S. Treasury—and by extension, everyday taxpayers—will be significant. The nonpartisan Joint Committee on Taxation, an arm of Congress focused on tax-related legislation, estimates that the pass-through provisions will cost the government $414.5 billion over the next decade.
The Real Estate Roundtable, a leading industry group that represents real estate owners, developers, management companies and other trade associations, appears to have led the push for the provisions, Rosenthal said.
“The tax bill was drafted by Republicans behind closed doors, with no Democratic input to my knowledge,” he added. “So Republicans would have been the gatekeepers in terms of who allowed the lobbyists in.”
The Roundtable’s 2017 tax policy agenda lists the pass-through as a priority. “Advocates of comprehensive tax reform seek to improve U.S. competitiveness by reducing the corporate tax rate,” the document says. “Any rate reduction, however, should apply across-the-board and not discriminate against certain types of businesses, such as partnerships.”
Roundtable CEO and President Jeffrey DeBoer drew a 2015 salary of $1,641,729, with total compensation for that year reaching $1,709,118, according to the organization’s latest IRS 990 form.
The Roundtable’s fourth quarter 2017 lobbying disclosure reveals that DeBoer was one of three lobbyists for the organization who sought changes to the tax code.
The group did not respond to a request for comment, and since the Roundtable has been silent on its role, there is some uncertainty over who was involved in the Washington sausage making. “This is the swamp,” Rosenthal deadpanned. “All of this is done to deepen the marshes of the swamp.”
Senate Finance Committee Chairman Orrin Hatch (R-Utah) and Representative Kevin Brady (R-Texas), chairman of the House Ways and Means Committee, were the two lead tax negotiators.
As a generous contributor to GOP coffers, the industry was well-positioned to have the ear of these and other lawmakers who drafted the tax plan. Real estate was the third most partisan industry in the 2016 election cycle, favoring Republicans to Democrats 52.6 percent to 47.1 percent, according to the nonpartisan Center for Responsive Politics’ Open Secrets database.
The sector is the seventh most generous industry contributor to Hatch over his career, with donations to the influential lawmaker totaling $1,141,982 since 1989, according to Open Secrets. During the 2016 election cycle, the real estate industry ranked seventh in donations to Brady, giving $196,300.
Sen. Bob Corker (R-Tenn.), a real estate investor, was a holdout on the tax bill until, critics contend, the pass-through language was added to win him over. Corker maintains that he was not aware of the provisions until they surfaced late in the legislative process and that they did not influence his decision to support the tax cut plan.
Hatch defended the tax break in a Dec. 18 letter to Corker. “That a new pass-through proposal was created out of whole cloth and inserted into the conference report—is an irresponsible and partisan assertion that is belied by the facts,” Hatch wrote.
He insisted that both chambers spent more than a year crafting legislative language that provided pass-through businesses with tax relief on “a level similar” to tax breaks granted to major corporations.
The Real Estate Roundtable maintains that capital-intensive industries such as real estate are responsible for spurring indirect job creation in the form of home builders and contractors. But Rosenthal counters that the same thing could be said of nearly any industry.
Another real estate trade group, the National Association for Industrial and Office Parks, better known as NAIOP, also did not respond to an interview request. It describes itself as the leading organization for developers, owners and other investors in office, industrial, retail, and mixed-use real estate.
Senator Hatch stated in his December letter that the goal of the tax break was to help “small- and family-owned businesses.” Yet two of the biggest beneficiaries happen to be President Trump, whose vast real estate portfolio includes towers in Manhattan, Panama City, Istanbul and Manila, along with son-in-law Jared Kushner, who serves as senior advisor to the president.
“The president will try to tell the American people that his great political victory is a win for working people, but they see all the benefits going to his type of businesses—real estate pass-throughs,” Senator Jack Reed (D-RI) said (scroll down for his comments) during a Dec. 19 floor speech.
The next day, Congress cleared the landmark tax plan.