By JAMES B. STEWART
President Trump likes to argue that the tax-reform legislation hurtling through Congress this week will protect low- and middle-income households, “not the wealthy and well connected.” He puts himself forward as Exhibit A.
“This is going to cost me a fortune,” he said on Wednesday in Missouri. “This is not good for me.”
So surely at least a few of the most egregious loopholes that benefit Mr. Trump and real estate developers like him will be closed.
Not in the slightest.
In fact, the proposals seem almost tailor-made to enrich the president and people like him.
“Commercial real estate came out essentially unscathed,” said Douglas Holtz-Eakin, president of the American Action Forum, a conservative advocacy group. Real estate developers “didn’t lose anything they care about,” and they got even more breaks, like a shorter depreciation schedule in the Senate tax bill, Mr. Holtz-Eakin pointed out.
Mr. Trump still has not released his tax returns, so it’s impossible to know to what extent he would personally benefit from the legislation. But there’s little doubt that he would.
“Lower pass-through rates and the repeal of the alternative minimum tax — those two alone are so hugely beneficial to Trump that I have trouble imagining any way that he wouldn’t come out ahead,” said Steve Wamhoff, senior fellow for federal tax policy at the nonpartisan Institute on Taxation and Economic Policy. (The pass-through reference involves income that typically comes from partnerships and limited liability companies.)
Not only that, but rental income, royalty payments and licensing fees — some of the president’s major sources of income — get especially favorable treatment under new rates for pass-through income. (Mr. Trump’s assets include more than 500 pass-through partnerships and limited liability companies.)
As many people have pointed out, the “wealthy and well connected,” as Mr. Trump described them, will benefit disproportionately from the proposed legislation. That’s in large part because the big tax cuts for corporations heavily favor shareholders, and the wealthy own a disproportionate amount of stocks and other assets.
Many wealthy taxpayers will also benefit from the lower rates on pass-through income, since such income accrues overwhelmingly to the wealthiest taxpayers.
And I have already pointed out that the modest changes proposed for the tax treatment of so-called carried interest — one of the most egregious loopholes — would have little or no impact on those who benefit from it, including wealthy real estate developers.
Even among that affluent population, the additional breaks that would benefit Mr. Trump and a small cadre of real estate developers like him stand out.
Consider one of the most criticized loopholes in the current tax code: the exemption from taxation of so-called like-kind exchanges. That has enabled owners of property to sell at a large capital gain but defer any tax as long as they use the proceeds to buy some other property.
The House and Senate bills eliminate the favored treatment of like-kind exchanges — except for “real property.” Owners of paintings, for example, would not be able to sell a Cezanne and buy a Van Gogh tax-free. But owners of commercial real estate could keep flipping the properties until they die without ever paying any capital gains tax. (And if the estate tax is abolished, the gains might go untaxed forever.)
One of the biggest reforms in the tax legislation would limit the ability of businesses to deduct interest payments from their taxable income while giving them the ability to expense capital improvements (rather than depreciate them). Commercial real estate interests had howled over this provision, because they rely so heavily on debt to finance their operations.
As is the case with properties owned by most developers, Mr. Trump’s properties appear to be highly leveraged. While he has not disclosed his exact borrowings, he has called himself the “king of debt” and a New York Times investigation found that his companies had borrowed at least $650 million. Other estimates have gone above $1 billion. And, in another windfall for people like Mr. Trump, both the House and Senate bills exempt “any real property trade or business” from the limitation on deducting business interest.
The list goes on. In both the House and Senate legislation, only certain kinds of income are eligible for the lower pass-through rates. Short-term capital gains, dividends, interest and annuity payments do not qualify.
But rent, royalties and licensing fees — all similar in character to the disallowed income — weren’t included in that list, Mr. Rosenthal pointed out. All remain eligible for the lower pass-through rate.
“I call them the Donald J. Trump exceptions,” since the president receives so much income from those sources, Mr. Rosenthal said. “Trump will get a huge windfall on his rental, license and royalty income,” he predicted.
A major way that losses are generated in real estate ventures is through depreciation, which is supposed to reflect the way that assets lose value over time. But a well-maintained building typically gains value (and maintenance costs are all deductible). So most depreciation charges lead to what the president might call “fake” losses, and they might never be recouped, because taxes on any sale can be deferred through like-kind exchanges.
The House and Senate rejected proposals to curb the use of such noncash charges. Instead, the Senate, by shortening the depreciation schedule for commercial property to 25 from 39 years, would accelerate the rate at which real estate investors can take such deductions.
From what little is known of Mr. Trump’s tax returns, he used losses to offset virtually all of his taxable income for years by generating something called net operating loss carry-overs. Under both the House and Senate versions, such carry-overs can be used to offset only 90 percent of a person’s taxable income (and, in the Senate version, 80 percent after 2022, which reverts to 90 percent after 2025 if revenue targets are met) in a given year. That is a modest improvement over the existing code, but it still allows for the full offset over time.
One of the biggest benefits for the president, and for other wealthy taxpayers with high deductions, is the proposed repeal of the alternative minimum tax. Thanks to Mr. Trump’s leaked 2005 tax return, we know that the only reason he paid federal tax of 24 percent of his taxable income that year was because of the alternative minimum tax. (Without it, he would have paid just 4 percent.)
The rationale for eliminating the alternative minimum tax is that such a backup system should not be necessary if the tax code is fundamentally fair and eliminates all the loopholes that made it possible for high-income taxpayers to escape taxation in the first place. As should be obvious by now, this legislation expands such loopholes.
“It’s surprising to me that no real attempt was made to close any of these loopholes,” said Mr. Wamhoff, given that “virtually every nonpartisan tax expert agrees that commercial real estate is already so favored by the tax code.” Even Democrats, for the most part, have remained silent.
Perhaps it shouldn’t be so surprising, given that the president is the real-estate-investor-in-chief, and that his personal interests align with one of the country’s most powerful lobbies.
“Real estate interests are very powerful when it comes to the tax laws,” Mr. Holtz-Eakin said. “They’ve got bipartisan support, and it’s been that way forever.”
Correction: November 30, 2017
An earlier version of this column misspelled the given name of a senior fellow at the Institute on Taxation and Economic Policy. He is Stephen Wamhoff, not Steven (but his preference is Steve).