By Aquiles Suarez
Whether at the local, state or federal level, the commercial real estate industry is accustomed to being targeted for tax increases. As the saying goes, “commercial real estate doesn’t vote.” It should not be a surprise to anyone, then, that we are an attractive place for politicians to look to when they are seeking more money to address a problem. The latest example of this is at the federal level, where members of congressional tax-writing committees are seriously considering eliminating or capping the current tax deduction for state and local taxes paid by businesses.
Commonly referred to as C-SALT (for corporate state and local tax deduction) or B-SALT (for business state and local tax deduction), this longstanding tax provision allows for businesses to treat state and local taxes, including property taxes, as businesses expenses that can be deducted from federal taxes. If B-SALT is in fact eliminated or capped, it would have an enormous detrimental impact on real estate businesses.
In general, the broader business community assumed that a Republican-controlled federal government would pursue pro-growth, pro-business tax policies, and looked forward to the certainty that renewal of expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA) would provide. So it helps to understand why this proposal is being contemplated in the first place. The answer is fairly straightforward: budget math and vote count.
Republicans are using a process called budget reconciliation to pass comprehensive tax legislation to include many of President Donald Trump’s tax priorities as well as renewal of expiring provisions of the TCJA. In the Senate, a bill first needs 60 votes to avoid the threat of a filibuster. But under Senate rules, a budget reconciliation bill is considered “privileged” – not subject to a filibuster and can pass with a simple majority. Senate Republicans, numbering 53 of 100 senators, therefore, need support from only 50 of their members to pass their agenda (Vice President JD Vance would cast the tie-breaking vote as provided by the U.S. Constitution).
Before the Senate can act, however, the reconciliation bill must pass the House. The House budget resolution, which is the first step needed to start the reconciliation process, provided for $4.5 trillion in additional revenue decreases over the next 10 years. That number is simply not enough to make all of the TCJA tax provisions permanent and include most of Trump’s campaign promises on taxes. That is the budget math problem.
A number of House Republicans from high-tax states like New York, Illinois and California would like to repeal the limitations that the TCJA imposed on the deductibility of state and local taxes for individuals. This is a priority for the so-called “SALT caucus,” many of whom are in very competitive districts. They vow not to vote for a reconciliation bill unless it includes some modification to the individual SALT deduction limitation. Republicans in the House of Representatives enjoy the very slimmest of majorities, and can afford to lose the support of maybe one or two members on any vote. Because no Democrats are expected to support the reconciliation bill, House Republicans need to address the needs of these members. That is the vote count problem.
Eliminating or raising the cap on the SALT deduction for individuals is expensive, costing $400 billion or more depending on how it is modified. So to fix the problem, the proposal would simply shift the burden to businesses and corporations by eliminating the B-SALT deduction. That would also raise hundreds of billions of dollars. This would solve both the math problem and the vote count problem.
But as Douglas Holtz-Eakin, the former Director of the Congressional Budget Office, recently wrote, this would be “a profound policy error” and a misunderstanding of the different roles in tax policy of individual and business (or corporate) SALT deductions:
Firms deduct the costs of generating income – wages, rents, capital costs, etc. – and CSALT is the recognition of those costs. Fully deducting those taxes is necessary to correctly measure net income, and thus necessary to correctly tax firms. Capping CSALT is professional malpractice.
For real estate business, the impact of eliminating the deductibility of property taxes in particular would be severe. Property taxes alone represent 40% of the operating costs of U.S. commercial real estate, and are greater expense than utilities, maintenance and insurance costs combined. It would result in lower commercial property values, which by itself is harmful but would also add additional strain on our banking system. And it essentially would eliminate much of the benefits of the TCJA’s policies such as the current deduction for pass-through-entities, raising the effective tax rates on businesses.
In short, eliminating B-SALT and the ability of real estate businesses to deduct their property taxes is bad tax policy that will result in undue harm to the commercial real estate industry and inhibit economic growth. NAIOP is actively lobbying Congress to forego this proposal, and has joined with its national industry allies in a broad real estate coalition letter to members of the House of Representatives and Senate citing our concerns. As the details of tax legislation continue to be negotiated and finalized, maintaining current law on the deductibility of business SALT, and in particular of property taxes, will be a top focus of our advocacy.
