Economy & Budget

Congress, make tax reform take the long view


The world today moves faster than it ever has before. Smartphones provide immediate access to people and information. Retailers deliver with blinding speed, often the same day. But not everything should, or can, be immediate. That’s true in tax policy, and in commercial real estate (CRE).

In the CRE industry, owners and operators often must wait years, even decades, to recoup their investments. Meanwhile, they keep pouring further spending into their properties to keep them up to code and to deliver the perks tenants demand. CRE doesn’t deliver immediate rewards, but forces owners to make the necessary long-term investments that will pay off for them and the economy.

{mosads}Likewise, as they look at ways to reform the nation’s tax code, lawmakers should also be taking the long view. Any changes should be geared to deliver long-term economic growth, rather than be an attempt to answer short-term federal budget revenue needs in ways that could harm the patient investors the economy needs.

There are many parts of the tax code that are boosting the economy. These provisions exist because they work. They’re not “loopholes,” but are actually incentives to encourage investment and growth.

Consider 1031 exchanges.

That’s the element of tax law that allows owners to swap similar properties without immediately paying capital gains taxes. Those taxes will, of course, be paid when the property is eventually sold (rather than swapped). Section 1031 was entered into the tax code almost a century ago, in 1921. The provision makes it possible for owners to trade properties, so they’re not locked into a particular location. It also makes it easier to do deals without borrowing money, which improves liquidity throughout the financial system.

This isn’t about avoiding taxes. In 2015, professors David Ling of the University of Florida and Milena Petrova of Syracuse University published an in-depth study on the issue. They looked at data on 1.6 million real estate transactions between 1997 and 2014. “We find that in 88 percent of the cases in our dataset investors dispose of properties acquired in a 1031 exchange through a taxable sale,” they write. In fact, taxes paid tended to jump. “The estimated taxes paid when an exchange is followed by a taxable sale are on average 19 percent higher than taxes paid when an ordinary sale is followed by an ordinary sale.”

The researchers also found that getting rid of 1031s could damage the real estate industry and increase costs to renters. They estimate that the elimination of like-kind exchanges would eventually produce commercial real estate prices declines of 8 to 12 percent, and real rent increases of 8 to 13 percent in the long run.

The former head of Shell Oil Company once said his industry works in what he called “energy time,” where it can take 15-30 years for investment in a well or project to pay off. We could coin a similar term, “CRE time,” for commercial real estate.

It can take many years for a new building to pay off. Tax policy needs to reflect an understanding of this economic reality.

It has been a generation since the tax code was last reformed. It’s long past time to update our tax code to the 21st century, drafting a code that spurs economic growth and increases our international competitiveness. In doing so, our leaders must avoid the temptation to think in terms of “political time,” with an eye on the next election, and instead take the long view.

The White House and House and Senate Republican leadership are releasing broad, agreed-upon principles that will guide their tax reform efforts. When lawmakers return after the August recess and attempt to put those principles into legislative language, they should come up with a tax code that encourages entrepreneurship and investment, while also maintaining protections for those who put money at risk on long-lived investments.

Thomas J. Bisacquino is president and CEO of NAIOP, the Commercial Real Estate Development Association. NAIOP is the leading organization for developers, owners, investors and related professionals in office, industrial, retail and mixed-use real estate.

The views expressed by contributors are their own and not the views of The Hill.

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