Democrats in the House are looking at the tax increase as a revenue raiser to offset the expense of several other measures, including an extension of unemployment benefits.
Under the bill, the real estate world, along with hedge fund managers and venture capitalists, would incur a phased-in tax increase on carried interest.
The group last Thursday reached out to House Ways and Means Committee Chairman Sandy Levin (D-Mich.) and Senate Finance Committee Chairman Max Baucus (D-Mont.), warning them that the tax increase would have unintended consequences for the real estate sector.
"If this legislation is enacted as currently drafted with the carried interest provision as an offset, a developer's incentive to take on necessary risk associated with real estate development will be greatly diminished," said the letter from the group, which represents cities with populations of 30,000 or more.
"Furthermore, higher capital gains rates will cause real estate owners to hold on to properties longer. The result of this behavior will lower tax revenues at the federal, state and local levels and limit opportunities for redevelopment of underutilized properties, hindering job creation."
Democrats are considering the tax increase as part of the the Promoting American Jobs and Closing Tax Loopholes Act. That legislation would extend other popular tax credits for businesses and individuals. It would also extend benefits for the unemployed, address the so-called "doc fix," extend welfare funding to states and modify Build America Bonds. The bill may also include funds for summer programs.
Levin said he expects a House vote on the measure this week, with Senate action on it before the Memorial Day recess.