When Republicans put a last-minute provision into the final tax bill, they tailored the bill in a way that significantly boosted the amount of potential tax cuts that could be reaped by real estate investors, according to a new analysis of federal data. That tweak could deliver huge benefits to a relatively small set of real estate moguls — such as President Donald Trump and Sen. Bob Corker.
Corker voted against the Senate version of the bill, which included restrictions on such tax breaks for real estate pass-throughs (including LLCS, partnerships and S-corporations) but then switched his position after the provision was added to the final bill. Facing outrage over the flip flop — including a trending #CorkerKickback hashtag — Republican Ways and Means Committee Chairman Kevin Brady insisted that the provision was not designed to be a payoff to Corker and other real estate moguls, but instead a way “to encourage businesses, pass-through businesses that do a lot of capital investment for growth — energy, advanced manufacturing, telecom.”
Yet an analysis of the most recent IRS data by Brookings-Urban Institute Tax Policy Center researcher Joe Rosenberg challenges that narrative. The data shows the provision’s benefits to real estate partnerships dwarfs the benefits it provides to other partnerships across the economy. The analysis also shows that the provision could potentially end up providing, on average, up to 10 times the amount of tax benefits to the real estate sector as the original Senate-passed bill.
“You can see who the specific winner is from this proposal — it’s startling, because real estate just totally sticks out,” Brookings-Urban Institute Tax Policy Center fellow Steve Rosenthal told International Business Times. “It shows that when you change the formula in the way the final bill changed the formula, the clear winner beyond any other industry is the real estate sector.”
Real estate interests are not just a powerful lobbying force on Capitol Hill, they are also a powerful constituency inside the government. Trump and Corker list vast ownership stakes in real estate LLCs and partnerships, and 13 lawmakers who directly oversaw the tax legislation made up to $2.6 and $16 million in income from such holdings in 2016. Trump generated between $41 million and $68 million of rental income from 25 pass-through LLCs and partnerships in 2016. Corker earned between $1.2 million and $7 million of annual rental income from real-estate related LLCs and partnerships that year.
Forbes on Tuesday estimated President Trump could save $11 million a year in taxes under the final bill. Economist Dean Baker has estimated that Corker could reduce his tax burden by as much as $1.1 million per year from the new provision alone.
Corker, who has clashed with Trump, has been in the spotlight because he changed his position on the tax legislation. On December 2, he was the only Republican to vote against the Senate bill when it included language effectively restricting how much of a personal benefit he could glean from the pass-through tax cuts. But then he announced his support for the final bill Friday, just hours before the release of the final bill that included the provision boosting the tax cuts to real estate investors like him.
Under the Senate bill, the tax cuts for real-estate-related pass-throughs were contingent on paying wages — the more wages a pass-through partner owner paid, the more of a tax cut would apply. The effect of the framework was to to target tax cuts to “job creators,” and avoid giving the same sized tax breaks to magnates who just stockpile rent-generating assets like buildings inside a partnership, and don’t employ workers.
Once the bill got to the House-Senate conference committee, however, the framework changed. Republican Sen. Orrin Hatch sculpted a provision letting LLC owners with few or no employees access the tax cuts, making their depreciable assets — such as real estate holdings — partially deductible.
“A significant — and surprising to many analysts — giveaway in the conference bill weakens the requirement for high-income owners to pay employee wages to be eligible relative to what was in the original Senate bill,” wrote 13 tax law experts in a new analysis of the final tax bill. “This addition will expand the ability of highly paid owners in certain industries — and particularly those heavy in property but light in employees, like real estate — to qualify for the pass-through deduction... Real estate firms with high original basis and few employees should be able to more easily access the preferential rate.”
A note on the chart cited above: Rosenberg used IRS statistics on partnerships, which include most LLCs, from 2014 to calculate the relationship between two different provisions in the tax bill, one that was in the Senate version and the final bill, and the controversial provision that was added only to the final bill.
The first provision was a wage restriction on the size of the deduction pass-through. This provision was intended to ensure a 20 percent deduction on income from “pass-through” entities, which don’t pay corporate tax rates, was targeted at those pass-through businesses that pay wages. The second provision, which was the controversial provision added to the final bill, allows firms to get around the wage restriction. If this provision is codified into law, firms can calculate how much of the deduction they could get by combining 25 percent of the wages they paid out to 2.5 percent of their depreciable assets, which include machinery, equipment and buildings.
By comparing the benefits between the two provisions, Rosenberg was able to identify to what degree the second provision could help specific industries reduce their tax bills. He found the real estate industry’s average benefit from the pass-through deduction could grow ten times between the Senate bill and the final reconciled tax bill.Business0