Special interests of every species and subspecies populate the office towers of downtown Washington, D.C. And the Republicans’ top tax writer just sent a threatening letter to all of them.
Rep. Dave Camp, chairman of the House Ways and Means Committee, recently rolled out his proposal for reforming the federal tax code. Tax reform means lowering rates and closing loopholes - that is, repealing deductions, exemptions and credits.
The arguments for tax reform are plentiful and powerful.
Our gnarled tax code drags on the economy. Consider General Electric's battalion of nearly 1,000 tax experts working to reduce the company's bill to Uncle Sam. There's nothing wrong with GE doing this. The shame is that it's worth it for GE to do this.
Corporate America's army of tax experts are good people with families to feed, but our economy would be better off if they were creating value rather than navigating arcane statutes, codes and rules.
Our tangled tax code also directs money to wasteful corners of the economy. Some people, for instance, invest in oil and gas wells not because they think it’s the most promising investment, but because it gets special tax treatment. Take the thousands of rules and deductions like this, and you get an ugly mass of investment dedicated to gaming the tax code, rather than to funding promising businesses. This inefficiency slows the economy.
But every inefficiency that hurts the broader economy is a subsidy that helps a specific industry or company – which is why tax reform is so hard.
Camp's reform would gore powerful industries by taking away their carve-outs. He would kill the tax credit for electric vehicles (sorry, Tesla), disallow deductions for lobbying (sorry, lobbyists), end special tax treatment for film and television production (sorry, Hollywood), phase out the tax credit for wind and solar generation of electricity (sorry, GE), and kill dozens of other targeted tax breaks.
You can imagine GE, Tesla, and Hollywood won’t stand by idly as Camp targets their tax breaks. But the biggest opponents of Camp’s reform will be from the real estate industry – builders, developers, realtors, and mortgage bankers.
Homeownership is the source of the biggest tax deductions for the average taxpayer. Your property taxes and the interest you pay on your mortgage are both deductible, saving taxpayers about $100 billion in 2014, according to a congressional estimate. Camp’s bill would end the deduction for property taxes, and cap the mortgage-interest deduction at $500,000 in mortgage debt.
Camp's proposal targets plenty of other tax breaks beloved by the real estate industry, such as credits for energy-efficient property, the first-time homebuyer credit, and low-income housing credits. Camp also proposes to tighten the boundaries around tax-preferred Real Estate Investment Trusts.
The biggest proposed blow to real estate developers and owners, however, might be Camp’s call to change the way hedge fund managers are paid.
Many investment funds, including hedge funds, are run as partnerships between investors and fund managers. Instead of the investors paying a fee to fund managers, the managers just take a big chunk of the investment’s gains. This type of compensation for fund managers, called “carried interest,” is taxed as capital gains (often at 15 percent) rather than as ordinary income (currently taxed at nearly 40 percent for the wealthy).
On the merits, carried-interest taxation is a tricky question. Many critics blast the tax treatment as a “loophole” for Wall Street billionaires, but hedge funders in Connecticut aren’t the only ones lobbying to save this “loophole.”
The NAIOP (which stands for National Association of Industrial and Office Properties and is also known as the Commercial Real Estate Development Association) lobbies against tax hikes on carried interest, as does the Building Owners and Managers Association, the International Council of Shopping Centers, and the National Multi-Housing Council (the apartment building lobby), to name a few.
The NMHC blasted Camp’s proposal on carried interest, and pointed out “41 percent of all investment partnerships are real estate related.” In other words, anything that curbs hedge funds also curbs real estate.
Why does real estate get walloped so hard by the Camp bill? It’s not because Camp bears any animus to developers, mortgage bankers, or realtors. It’s because nobody has so successfully tilted the tax code in their favor. The National Association of Realtors has been the top single-industry lobby in each of the past three years. And mortgage lenders are hardly shy when it comes to politics.
Republican leaders aren't yet rallying behind Camp's proposals — which must come as a relief for the special interests.Timothy P. Carney, The Washington Examiner's senior political columnist, can be contacted at email@example.com. His column appears Sunday and Wednesday on washingtonexaminer.com.