Why reward incompetence?
Within minutes after the Senate Finance Committee had unanimously approved its far-reaching and far-sighted tax-reform bill, an effort was launched by the National Association of Realtors, the National Homebuilders Association and their associates in the financial community to discredit the measure. They would have you believe that the bill would be disastrous for the real estate industry, would cause massive unemployment and would be cataclysmic for those who have invested in real estate throughout the country. They couldn't be more wrong.
It so happens that I have been a real estate developer for some 30 years. During that time, I have enjoyed and benefited from a federal tax policy that permits those in my industry to earn substantial income while paying minimum taxes. It has certainly been fun for lots of us. But that doesn't mean that the federal largess, given to us at the expense of other taxpayers, has constituted sound public policy that should be continued.
As frequently happens when a group gets a government windfall, my associates seem to have deluded themselves into believing that they deserve their tax loopholes. They have hired an impressive battery of lawyers, public relations consultants and lobbyists to develop and articulate arguments that their present benefits serve the national interest and must be perpetuated. But the simple truth is that the current tax incentives aren't even serving the best interests of the real estate industry.
The principal problem facing real estate developers and owners today is overbuilding, which has supersaturated nearly every major market in the country with unneeded and half-vacant buildings. Yet, because of tax laws that allow investors to benefit substantially even when the projects are otherwise uneconomic, the building boom continues.
Certainly, the present tax incentives are not the sole cause of overbuilding, but they are a significant contributing factor. By allowing developers to cushion their mistakes, the government has been subsidizing incompetence. The bill approved by the Senate Finance Committee would be a major step toward encouraging sound development projects and toward improving the efficiency of the industry. It would discourage mismanagement and reward competent planning and execution. That doesn't sound terribly un-American to me.
Smart real estate players recognize that basic supply and demand relationships, properly observed, provide more reliable opportunities for long-term gains than favorable tax legislation, inflation or other less predictable factors. As the overbuilding in the market gradually diminishes, rents can be expected to increase. So, investors who plan to hold real estate for long-term appreciation are likely to benefit from the new tax bill.
The real losers will be the tax-oriented syndicators, particularly the Wall Street promoters whose primary interest is not in developing sound real estate projects, which are needed by a community, but in creating tax-avoidance schemes, which will appeal to wealthy potential investors. They need the rapid write-offs (which have no relationship to the actual economic life of the property) to make their syndications attractive as tax dodges. And for their efforts, they skim off huge fees, which certainly makes their hysterical lobbying against tax reform understandable, but hardly credible.
The fact is that favorable tax provisions have encouraged investors to pay far more for many of these projects than underlying economics would justify. I firmly believe that the real estate industry -- and the country -- would be better off if investors paid more attention to pre-tax economics of potential projects and if the promoters and syndicators of the tax gimmicks applied their creative talents to more productive pursuits.
While a proper objective of the tax code is to promote economic growth, this in no way justifies singling out real estate for disproportionate benefits. The mere presence of an office building or a warehouse does not attract businesses, anymore than the mere presence of a home attracts tenants. The demand for real estate is derivative, depending primarily on increases in population and income along with growth in other industries. To the extent that the Senate bill encourages broad economic growth, the demand for real estate will increase and buildings will be constructed to satisfy that demand. Accordingly, in the long run, I am convinced that the Senate bill will place the real estate industry on a more sound and stable foundation.
The most appealing of the proposed reform, however, is its simplicity and fairness. There is something basically unjust when wealthy individuals and profitable corporation avoid paying taxes through tax shelter schemes. The Senate proposal is a major step toward ensuring that the cost of government is shared equitably by all citizens, according to their ability to pay, not according to some fortuitous tax blessing bestowed by Congress -- with questionable results.