Tax Reform Alive and Well Within Statehouses
By: Toby Burke, senior director of state and local affairs, NAIOP
The tax reform debate is still going strong in state legislatures across the nation, and NAIOP and its members must remain engaged.
WHILE CONGRESS CONTINUES to explore a path forward in reforming the federal tax system, which hasn’t been updated since 1986, state legislatures have remained active in updating and amending their tax structures in order to spur economic growth and make their states more competitive. Last December, the American Legislative Exchange Council (ALEC) issued its 2014 “State Tax Cut Roundup” report, which analyzed which state legislatures passed laws substantially cutting taxes that not only apply broadly and equitably without favoring one sector of the economy, but also result in a net tax decrease. ALEC determined that 14 states (including both Red and Blue ones) met this tax-cutting criteria: Arizona, Florida, Indiana, Kansas, Maryland, Michigan, Minnesota, Missouri, Nebraska, New York, Ohio, Oklahoma, Rhode Island and Wisconsin. Six of these — Florida, Indiana, Kansas, Nebraska, Ohio and Wisconsin — cut taxes during both the 2013 and 2014 sessions of their legislatures, according to ALEC.
The trend of cutting taxes and reforming tax structures at the state level is expected to continue in 2015. States such as Florida, Georgia, Minnesota and North Carolina are considering tax reform proposals involving corporate and individual income tax rates, state sales tax levels, tax exemption criteria, estate or death tax modifications and other tax restructuring measures. However, the tax reform debate can become as contentious and divisive in state legislatures as it is in Congress. Even when each legislative chamber and its leaders, including the governor and the executive branch, agree that tax reform is needed, they may disagree on which taxes to simplify, eliminate or increase as they debate how to restructure a state’s tax system and revenue stream. One example of a significant restructuring would be shifting the tax collection structure from a progressive corporate or individual income tax to a flat income tax or a value-added sales tax.
The 2013 session of the North Carolina General Assembly illustrates the challenging legislative and poli-tical debate that often occurs when considering tax proposals that involve reforming tax collection structures, lowering one tax while increasing another or taxing a service or entity not previously subjected to a sales tax. A common phrase heard in the halls of the General Assembly was “lower the rate and spread the base.” The final tax reform legislation signed into law by Governor Pat McCrory in 2013 lowers the personal income tax from 7.75 to 5.75 percent and the corporate tax from 6.9 to 5 percent, both over a two-year period, with the corporate tax eventually falling to as low as 3 percent if revenue targets are met. While the debate and the legislative process can be confrontational, as it was in North Carolina two years ago, state tax reform can be achieved. Admittedly, some North Carolina policymakers would argue that the state did not go far enough in 2013 or set the wrong tax priorities, which is why the tax reform discussion is expected to reemerge during this year’s session, as the legislature debates a balanced biennial budget.
Not all tax reform proposals benefit commercial real estate owners or their tenants, and some may even threaten economic growth and opportunity. For example, attempts frequently are made — including a recent state ballot initiative in Nevada that was defeated — to pass legislation imposing a franchise or margin tax that would discourage job creation and harm the CRE industry by deterring companies or potential tenants from relocating from other states. In addition, legislators in California — and now in Texas as well — have been debating proposals that would increase state revenue by placing a heavier property tax burden on CRE, commonly referred to as split roll tax legislation.
A state’s fiscal condition can also influence the tax debate. Achieving meaningful tax reform can become much more challenging when a statehouse is facing a fiscal shortfall while also trying to achieve a balanced budget, with revenues matching expenditures. However, this does not necessarily mean that instituting tax reform becomes easier when a state has a budgetary surplus. There are often competing interests on what to do with a budget surplus, from reducing the tax burden for individuals and companies to expanding funding for government programs such as education.
As federal, state and local governments continue to debate tax reform, including fee increases, and pass laws and make rules affecting commercial real estate, it is important for NAIOP and its members to remain involved in the legislative process, from the ballot box to Capitol Hill, so that CRE is ensured a seat at the table during legislative discussions and the drafting of regulations that impact the industry.
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A like-kind exchange or “1031 exchange” refers to section 1031 of the U.S. Internal Revenue Code. This section of the U.S. Internal Revenue Code provides that capital gains taxes can be deferred in cases of exchanges of property held for productive use in a trade or business or for investment, provided the properties exchanged are comparable (“of like kind”). When the taxpayer ultimately sells the asset, the tax is paid. In commercial real estate, the provision encourages transactions because it enables investors to overcome the “lock-in” effect of tax rules, allowing them to remain invested in real estate while shifting resources to more productive properties or changing geographic locations.