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| Trump's Industry, Real Estate, Poses Hurdle to Tax Overhaul | |
| (about 20 hours later) | |
| President Trump has promised a sweeping tax plan, arriving in the days ahead, that will be “bigger, I believe, than any tax cut ever.” It will aim to bring down individual and corporate rates, simplify the overall tax code and unleash economic growth. | President Trump has promised a sweeping tax plan, arriving in the days ahead, that will be “bigger, I believe, than any tax cut ever.” It will aim to bring down individual and corporate rates, simplify the overall tax code and unleash economic growth. |
| Many tax experts say a key element to any fundamental overhaul is getting rid of certain deductions for businesses — the “special-interest giveaways that are masked as tax breaks,” as House Republicans describe many of them in their own proposal. That is the only way tax rates for much of the country can go down without starving the Treasury, the experts say. | Many tax experts say a key element to any fundamental overhaul is getting rid of certain deductions for businesses — the “special-interest giveaways that are masked as tax breaks,” as House Republicans describe many of them in their own proposal. That is the only way tax rates for much of the country can go down without starving the Treasury, the experts say. |
| But there is a major roadblock to that fundamental change, and it comes from a sector well known to the president: the real estate industry. | But there is a major roadblock to that fundamental change, and it comes from a sector well known to the president: the real estate industry. |
| As the nation’s first real estate developer-president — one who has refused to divest his holdings while occupying the Oval Office and has declined to release his past tax returns — Mr. Trump brings his career perspective to the tax question, as well as a substantial financial stake in the outcome. | As the nation’s first real estate developer-president — one who has refused to divest his holdings while occupying the Oval Office and has declined to release his past tax returns — Mr. Trump brings his career perspective to the tax question, as well as a substantial financial stake in the outcome. |
| His interest will be shared by small builders, brokers and contractors in congressional districts across the country. And as they showed in rolling back previous changes that had taken away advantages, their lobbying prowess is formidable. | His interest will be shared by small builders, brokers and contractors in congressional districts across the country. And as they showed in rolling back previous changes that had taken away advantages, their lobbying prowess is formidable. |
| “There’s probably no special interest that’s more favored by the existing tax code than real estate,” said Steven M. Rosenthal, a real estate tax lawyer and senior fellow at the centrist Urban-Brookings Tax Policy Center. “It’s really hard to take that industry on.” | “There’s probably no special interest that’s more favored by the existing tax code than real estate,” said Steven M. Rosenthal, a real estate tax lawyer and senior fellow at the centrist Urban-Brookings Tax Policy Center. “It’s really hard to take that industry on.” |
| Much of the attention will focus on the tax deduction for interest payments by businesses, a provision that Mr. Trump has used to great advantage in what little has been seen of his past tax returns. The House Republican plan calls for eliminating the deduction as part of an overall plan, helping offset lower tax rates. The nonpartisan, conservative-leaning Tax Foundation says the provision could be a $1.5 trillion proposition over the next decade. | Much of the attention will focus on the tax deduction for interest payments by businesses, a provision that Mr. Trump has used to great advantage in what little has been seen of his past tax returns. The House Republican plan calls for eliminating the deduction as part of an overall plan, helping offset lower tax rates. The nonpartisan, conservative-leaning Tax Foundation says the provision could be a $1.5 trillion proposition over the next decade. |
| The National Multifamily Housing Council, a trade association of apartment owners, managers, developers and lenders, has come to the defense of the interest deduction and other provisions favorable to the real estate industry, describing them as “core principles” and promising a fight. So has the influential Real Estate Roundtable, whose board includes several of Mr. Trump’s fellow New York developers. | The National Multifamily Housing Council, a trade association of apartment owners, managers, developers and lenders, has come to the defense of the interest deduction and other provisions favorable to the real estate industry, describing them as “core principles” and promising a fight. So has the influential Real Estate Roundtable, whose board includes several of Mr. Trump’s fellow New York developers. |
| The interest deduction issue “is about to heat up dramatically,” predicted Douglas Holtz-Eakin, an economist who served as director of the Congressional Budget Office and is now president of the American Action Forum, a conservative pro-growth advocacy group. | The interest deduction issue “is about to heat up dramatically,” predicted Douglas Holtz-Eakin, an economist who served as director of the Congressional Budget Office and is now president of the American Action Forum, a conservative pro-growth advocacy group. |
| The real estate lobby has prominent allies in both parties. After the last major overhaul of the tax code, in 1986 — under a Republican president, Ronald Reagan, and a Democratic Congress — it was a Democrat, Bill Clinton, who signed legislation that restored lost real estate tax breaks seven years later. | The real estate lobby has prominent allies in both parties. After the last major overhaul of the tax code, in 1986 — under a Republican president, Ronald Reagan, and a Democratic Congress — it was a Democrat, Bill Clinton, who signed legislation that restored lost real estate tax breaks seven years later. |
| While the Trump administration has yet to put forward a plan, Mr. Trump has embraced several key proposals, including some at odds with the House Republican blueprint. His ideas, in many cases, would enhance benefits to developers like himself. | While the Trump administration has yet to put forward a plan, Mr. Trump has embraced several key proposals, including some at odds with the House Republican blueprint. His ideas, in many cases, would enhance benefits to developers like himself. |
| “Trump said he knows where the loopholes are, but so far he hasn’t proposed closing any of them,” Mr. Rosenthal said. “Maybe he will. But so far he hasn’t made any of the hard decisions that would show he’s willing to close the loopholes that benefit him in order to make the tax code more fair and efficient.” | “Trump said he knows where the loopholes are, but so far he hasn’t proposed closing any of them,” Mr. Rosenthal said. “Maybe he will. But so far he hasn’t made any of the hard decisions that would show he’s willing to close the loopholes that benefit him in order to make the tax code more fair and efficient.” |
| Certain tax breaks, in fact, seem to exist solely or primarily to benefit the real estate industry, with dubious benefits or even harmful effects for the broader economy. | Certain tax breaks, in fact, seem to exist solely or primarily to benefit the real estate industry, with dubious benefits or even harmful effects for the broader economy. |
| Start, for example, with the ability of businesses to deduct interest payments. More than in just about any industry, real estate investors use leverage — borrowed money — to enhance returns. They lower their taxes by deducting interest payments. The New York Times has reported that Mr. Trump’s businesses have at least $650 million in debt. | Start, for example, with the ability of businesses to deduct interest payments. More than in just about any industry, real estate investors use leverage — borrowed money — to enhance returns. They lower their taxes by deducting interest payments. The New York Times has reported that Mr. Trump’s businesses have at least $650 million in debt. |
| Although the corporate tax code has allowed interest payments to be deducted since it was enacted in 1913, a growing number of economists and tax experts have called for abolishing the deduction, as does the House Republican tax plan, “A Better Way,” on grounds that it distorts capital markets by favoring debt over stock. (Dividend payments are not deductible.) | Although the corporate tax code has allowed interest payments to be deducted since it was enacted in 1913, a growing number of economists and tax experts have called for abolishing the deduction, as does the House Republican tax plan, “A Better Way,” on grounds that it distorts capital markets by favoring debt over stock. (Dividend payments are not deductible.) |
| Mr. Trump’s campaign staff indicated last summer that he wanted to keep the interest deduction. But then Mr. Trump came out in favor of another key element of the House Republican plan: immediate deductibility, or expensing, of capital expenditures, rather than the practice of depreciating assets over time. | Mr. Trump’s campaign staff indicated last summer that he wanted to keep the interest deduction. But then Mr. Trump came out in favor of another key element of the House Republican plan: immediate deductibility, or expensing, of capital expenditures, rather than the practice of depreciating assets over time. |
| Tax experts broadly agree that the interest deduction is untenable if the code also allows immediate expensing. That’s because many investors would borrow large sums to make capital expenditures (like buildings), immediately deduct all of the cost and continue to deduct the interest payments — “double dipping,” as Mr. Rosenthal put it. | Tax experts broadly agree that the interest deduction is untenable if the code also allows immediate expensing. That’s because many investors would borrow large sums to make capital expenditures (like buildings), immediately deduct all of the cost and continue to deduct the interest payments — “double dipping,” as Mr. Rosenthal put it. |
| The Tax Foundation estimated that immediate expensing would cost the Treasury $2.2 trillion over the first decade. Over time, the amount declines as taxpayers stop taking depreciation deductions. Eliminating the interest deduction would offset some, but not all, of that 10-year loss, while retaining the deduction would create a huge revenue hole. | The Tax Foundation estimated that immediate expensing would cost the Treasury $2.2 trillion over the first decade. Over time, the amount declines as taxpayers stop taking depreciation deductions. Eliminating the interest deduction would offset some, but not all, of that 10-year loss, while retaining the deduction would create a huge revenue hole. |
| Mr. Rosenthal put it bluntly: “Coupling an interest deduction with expensing is ridiculous.” | Mr. Rosenthal put it bluntly: “Coupling an interest deduction with expensing is ridiculous.” |
| In response to the criticism, Mr. Trump pivoted and said he would give taxpayers the “option” of either taking the interest deduction or expensing capital expenditures, not both. But that adds yet another layer of complexity and would be even more costly for the Treasury, since taxpayers would presumably choose the option that resulted in the lower tax bill. | In response to the criticism, Mr. Trump pivoted and said he would give taxpayers the “option” of either taking the interest deduction or expensing capital expenditures, not both. But that adds yet another layer of complexity and would be even more costly for the Treasury, since taxpayers would presumably choose the option that resulted in the lower tax bill. |
| Moreover, it is hard to see a path toward reducing overall corporate tax rates — the crucial element in making any overhaul palatable to a wide swath of businesses — without the added revenues from eliminating the interest deduction. | Moreover, it is hard to see a path toward reducing overall corporate tax rates — the crucial element in making any overhaul palatable to a wide swath of businesses — without the added revenues from eliminating the interest deduction. |
| (Individuals generally cannot deduct interest payments — with the major exception of mortgage interest, another boon to the real estate industry, albeit one that also benefits millions of homeowners. Mr. Trump has said eliminating the mortgage deduction is off the table.) | (Individuals generally cannot deduct interest payments — with the major exception of mortgage interest, another boon to the real estate industry, albeit one that also benefits millions of homeowners. Mr. Trump has said eliminating the mortgage deduction is off the table.) |
| Then there is the ability of “active” real estate investors such as Mr. Trump (but virtually no other group) to deduct their real estate losses against other income. That loophole was eliminated for most investors — including real estate investors — in the landmark tax legislation in 1986. But because of aggressive lobbying by the powerful real estate industry, including Mr. Trump himself, Congress passed legislation in 1993 restoring the tax break for so-called active real estate developers. | Then there is the ability of “active” real estate investors such as Mr. Trump (but virtually no other group) to deduct their real estate losses against other income. That loophole was eliminated for most investors — including real estate investors — in the landmark tax legislation in 1986. But because of aggressive lobbying by the powerful real estate industry, including Mr. Trump himself, Congress passed legislation in 1993 restoring the tax break for so-called active real estate developers. |
| Portions of Mr. Trump’s 1995 tax returns leaked to The Times show that he took full advantage of the provision. That year he recorded a loss of nearly $16 million from “rental real estate, royalties, partnerships, S corporations, trusts, etc.,” which are the forms in which Mr. Trump holds most of his assets. That was more than enough to entirely offset his $3.4 million in business income, $7.4 million in interest and $6,000 in wages and salaries. | Portions of Mr. Trump’s 1995 tax returns leaked to The Times show that he took full advantage of the provision. That year he recorded a loss of nearly $16 million from “rental real estate, royalties, partnerships, S corporations, trusts, etc.,” which are the forms in which Mr. Trump holds most of his assets. That was more than enough to entirely offset his $3.4 million in business income, $7.4 million in interest and $6,000 in wages and salaries. |
| Mr. Trump hasn’t addressed this loophole since becoming president. But closing it would be hard to reconcile with his earlier comments. In 1991, he testified in Congress that the 1986 Tax Reform Act “was an absolute catastrophe for the country, for the real estate industry,” and pleaded to restore the passive loss tax break. In a 1999 op-ed piece in The Wall Street Journal, Mr. Trump called the 1986 act “one of the worst ideas in recent history,” and said eliminating the ability to deduct passive losses was one of the “follies” that had “sent the real estate market though the windshield.” | Mr. Trump hasn’t addressed this loophole since becoming president. But closing it would be hard to reconcile with his earlier comments. In 1991, he testified in Congress that the 1986 Tax Reform Act “was an absolute catastrophe for the country, for the real estate industry,” and pleaded to restore the passive loss tax break. In a 1999 op-ed piece in The Wall Street Journal, Mr. Trump called the 1986 act “one of the worst ideas in recent history,” and said eliminating the ability to deduct passive losses was one of the “follies” that had “sent the real estate market though the windshield.” |
| Alan Cole, an economist at the Tax Foundation, said it was difficult to estimate how much that provision costs the Treasury, because the underlying data is not available. | Alan Cole, an economist at the Tax Foundation, said it was difficult to estimate how much that provision costs the Treasury, because the underlying data is not available. |
| (Whether Mr. Trump would still qualify as an active real estate investor now that he is in the White House and has handed over management of his business interests to his sons is an open question. Ordinarily an investor has to spend 750 hours a year working in real estate to qualify, which would be hard to reconcile with Mr. Trump’s presidential duties.) | (Whether Mr. Trump would still qualify as an active real estate investor now that he is in the White House and has handed over management of his business interests to his sons is an open question. Ordinarily an investor has to spend 750 hours a year working in real estate to qualify, which would be hard to reconcile with Mr. Trump’s presidential duties.) |
| Another loophole for real estate developers is the so-called like-kind exchange provision, which allows real estate investors to defer or even eliminate capital gains tax by using the proceeds from a sale to reinvest in a similar property (which does not have to be all that similar — just about any real estate can be exchanged, even an apartment complex for vacant land). | Another loophole for real estate developers is the so-called like-kind exchange provision, which allows real estate investors to defer or even eliminate capital gains tax by using the proceeds from a sale to reinvest in a similar property (which does not have to be all that similar — just about any real estate can be exchanged, even an apartment complex for vacant land). |
| Since Mr. Trump has not released his tax returns, the public doesn’t know whether and to what extent he benefits from the provision, but nearly all real estate developers use like-kind exchanges to avoid capital gains tax. The Real Estate Roundtable strongly backs the provision. Mr. Trump hasn’t said whether he would retain it. But it is another special-interest loophole that nearly all tax experts would eliminate. | Since Mr. Trump has not released his tax returns, the public doesn’t know whether and to what extent he benefits from the provision, but nearly all real estate developers use like-kind exchanges to avoid capital gains tax. The Real Estate Roundtable strongly backs the provision. Mr. Trump hasn’t said whether he would retain it. But it is another special-interest loophole that nearly all tax experts would eliminate. |
| The Tax Foundation estimates that taxing like-kind exchanges would generate $92 billion in additional revenue over 10 years. | The Tax Foundation estimates that taxing like-kind exchanges would generate $92 billion in additional revenue over 10 years. |
| Advocates of a tax overhaul often point to the 1986 act as a model for a comprehensive approach that ushered in a long period of economic growth. Given the power of the real estate lobby, “presidential leadership was crucial,” said Leonard E. Burman, director of the Urban-Brookings Tax Policy Center and a professor at the Maxwell School of Syracuse University. | Advocates of a tax overhaul often point to the 1986 act as a model for a comprehensive approach that ushered in a long period of economic growth. Given the power of the real estate lobby, “presidential leadership was crucial,” said Leonard E. Burman, director of the Urban-Brookings Tax Policy Center and a professor at the Maxwell School of Syracuse University. |
| Reagan made tax reform a central campaign theme and mustered bipartisan support in Congress. “Reagan didn’t get into the details,” Mr. Burman said. “But he made the calls, he gave the speeches, and he got people excited about the idea of fixing our broken tax system.” | Reagan made tax reform a central campaign theme and mustered bipartisan support in Congress. “Reagan didn’t get into the details,” Mr. Burman said. “But he made the calls, he gave the speeches, and he got people excited about the idea of fixing our broken tax system.” |
| “It’s hard to imagine President Trump doing that,” he said. “Because at the end of the day, the existing tax code is great for people like him.” | “It’s hard to imagine President Trump doing that,” he said. “Because at the end of the day, the existing tax code is great for people like him.” |