As another sign of the troubling philosophy of leaders in Washington to tax more to spend more, this week they plan massive tax hikes on job-creators and economic development engines that will harm us all.
This tax hike will take the form of changes to partnership earnings called “carried interest.”
Though unfamiliar to many, raising taxes on these earnings will add to the burden on state and local taxpayers, jeopardize pension funds, and throw another wrench into our hopes for an economic recovery. Here’s how.
While these job-killing taxes would impact all partnerships, let’s examine how this would affect one sector of our economy that is fighting to recover from the economic downturn: real estate.
Currently, income from partnership investments in housing and real estate is taxed at 15% as a capital gain, just like all other investments are. But under this plan, it would be taxed as ordinary income, as high as 39.6% next year. This is no small niche part of our economy—it represents $4.4 trillion in investments by 6.8 million investors, according to Claremont Graduate University expert John Rutledge.
This will depress economic activity in the already fragile commercial real estate sector, driving down property values and costing countless jobs in the construction and building industries. As professor Rutledge recently told The Wall Street Journal, “This means less capital formation, less construction activity, less manufacturing activity for capital goods makers and their supplies, fewer start-ups, fewer jobs, lower productivity growth, and lower wages.”
This is not a recipe for an economic turnaround—just the opposite.
But the impact will be felt closer to home as well.
Retiree pension funds are heavily invested in real estate partnerships, to the tune of $162 billion. Killing these economic drivers will jeopardize these pension plans, and with it, the retirement security of millions of Americans. These pensioners do not live on Fifth Avenue. They live in every town and city across America.
Lastly, as well all know too well, state and local budgets nationwide are in crisis. We also know that local budgets are dependent on strong property values, yet these tax hikes will eviscerate the ability for partnerships to invest in our communities. Old manufacturing sites won’t be redeveloped. New construction won’t break ground. On-going projects will come to a halt. Communities won’t improve and attract follow-on investment.
Property values will fall along with local revenues, leading to an endless stream of red ink at city hall. The solution, as we’ve seen already, will be massive local property tax hikes or cuts in schools and services. That’s why the U.S. Conference of Mayors and the National Association of Counties have passed resolutions strongly opposing these tax hikes on the commercial real estate sector.
The time is long past due for Washington to pay its bills not on the backs of taxpayers, workers, small businesses and investors. This tax hike is worse than kicking the solution to our economic and fiscal crisis down the road; it’s crushing it.