Donald Trump’s victory in Tuesday’s presidential election makes him the first candidate in over a century to reclaim the White House after losing a re-election bid, and we expect his second term to have a significant impact on federal tax policy.
Republican tax priorities also received a boost on Tuesday when, for the first time since 2018, they regained control of the Senate after picking up seats in West Virginia, Ohio and Montana and overcoming challenges in Florida, Nebraska and Texas. With races yet to be called in Pennsylvania, Michigan, Wisconsin and Nevada, the only questions left are the size of the Republican majority and the identity of the next Senate majority leader.
The first of those questions could take a few days to answer, but Senate Republicans are scheduled to meet next week to choose their next leader. At the time of this writing, Senators John Thune (R-SD), John Cornyn, (R-TX) and Rick Scott (R-FL) are the declared candidates, but because the race is determined by a secret ballot, it is too early to predict a front runner.
The new Republican majority will also mean new committee chairs. One important development for tax legislation is that Senator Mike Crapo (R-ID), currently the ranking member of the Senate Finance Committee, is expected to become the next chairman of this influential committee.
As the ranking member of Senate Finance Committee, Crapo has emphasized priorities aligned with the 2017 Tax Cuts and Jobs Act and advocated for policies that support economic growth through tax reform. His approach will likely prioritize extending and solidifying elements of the 2017 tax law, which include lower capital gains rates, maintaining the current 20% deduction for pass-through income in Section 199A, making temporary tax provisions permanent, and simplifying tax regulations for small businesses.
Control of the House of Representatives has yet to be determined as ballot counting continues in competitive battleground districts. If Republicans maintain the majority, Congressman Jason Smith (R-MO) will retain the House Ways and Means Committee gavel, making him the House point person on tax policy. His tax priorities are primarily aligned with those of Crapo.
If Democrats win enough of the remaining yet-to-be-called seats to gain a majority, current Ways and Means Committee Ranking Member Richard Neal (D-MA) will take the committee gavel. This will likely result in a more modest tax bill. Democratic tax priorities affecting commercial real estate are likely to focus on initiatives that include expanding tax credits for low-income housing to incentivize developers to build more affordable units.
In addition, climate change and sustainability will be on the Democrats’ agenda. For this reason, we expect them to promote tax incentives for green building practices and energy-efficient upgrades. They may also look to refine or redirect incentives for opportunity zones to ensure they meet their goals of equitable development.
Tax credits and other incentives cost money and to pay for these, we expect Democrats to push for an increase in capital gains rates, particularly for high-income earners.
On behalf of our more than 21,000 members, NAIOP Government Affairs has long advocated for federal tax policy that aligns the economics of real estate development and investment, to promote capital formation and foster community development. That is why we have prioritized four provisions that must be included in the future tax law.
Federal tax policy should recognize the long-term, capital-intensive nature of real estate assets, and the continued investment needed to maintain vibrant commercial real estate markets that lead to job creation and economic growth in our communities. A lower tax rate on capital gains income is needed to ensure investment in long-lived commercial real estate assets.
In commercial real estate, like-kind exchanges providing tax deferral under Section 1031 are particularly important. Real estate assets are long-lasting, and past depreciation increases the tax burden of transferring property, creating a “lock-in” effect. Limiting the availability of these important tax deferrals would severely undermine modern commercial real estate markets, threatening their liquidity and resulting in reduced investment and transactions.
Real estate partnerships and other pass-through businesses drive job growth and are an important source of entrepreneurial activity. The current 20% deduction for pass-through income in Section 199A of the tax code is designed to ensure that pass-through entities are not disadvantaged compared to corporations that are taxed at lower rates, and should be maintained.
This past summer, NAIOP successfully secured the bipartisan introduction of legislation that would create a tax credit to spur the conversion of vacant and underutilized commercial buildings to residential use. This legislation known as the Revitalizing Downtowns and Main Streets Act was introduced by Congressman Mike Carey (R-OH) and Congressman Jimmy Gomez (D-CA). We believe that these adaptive reuse conversions will help increase the supply of housing in many areas and contribute to restoring economic activity in communities negatively affected by hybrid and remote work patterns.
