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COMMENTARY: Hoteliers Need To Defend Like-Kind Exchanges

COMMENTARY: Hoteliers Need To Defend Like-Kind Exchanges

This article originally appeared in the November 2017 issue of LODGING.

Lawmakers are making progress on tax reform, albeit at Congress’ glacially slow pace. House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell have made an overhaul of the tax code their top legislative priority this fall, along with their deputies who lead the tax-writing committees in both chambers.

The hospitality industry may be positioned for even greater growth in the years to come should their efforts succeed. The Republican leaders, along with the Trump administration, aim to cut individual and corporate tax rates, as well as create a new tax bracket for pass-through businesses. This infusion of capital back into the economy will have a major impact.

The corporate tax rate is due for a cut, if only just to keep up with the rest of the world. As companies increasingly compete internationally, the U.S. corporate tax structure has fallen further and further behind. According to the nonpartisan Tax Foundation, the U.S. has the third-highest corporate tax rate in the world at nearly 39 percent, while the average corporate rate in the world is just 22.5 percent.

The proposal to create a new tax structure for pass-through businesses will transform the small-business climate in the country. Currently, such income is taxed at the individual rate. Lawmakers hope to see a pass-through rate closer to the ultimate corporate rate, which will spur small-business creation and growth.

The simplification of the tax code—eliminating complexities that cost businesses and individuals alike billions per year in compliance—will be a big boost to the economy, but it is also an area where hoteliers need to remain vigilant.

Lawmakers hope to find additional revenue in simplification to make tax reform deficit-neutral, a key requirement of the Senate rules for reform to be permanent (otherwise, the bill would be required to have a 10-year sunset).

To be clear, even deficit-neutral tax reform will present billions of dollars in savings for businesses through reduced accounting and legal costs. Nonetheless, we need to ensure that lawmakers do not throw out key pro-growth provisions as they eliminate the loopholes and special-interest giveaways and search for ways to increase revenue.

One such item is the like-kind exchanges under section 1031 of the tax code. This century-old provision is used by businesses of all sizes that own, buy, or sell commercial real estate. Under a like-kind exchange, the sale of real estate does not become a taxable event if the entire proceeds from the sale are invested in a similar asset of equal or greater value during a short period of time.

The boost that like-kind exchanges give to the economy and job creation is real. A 2015 study by Ernst and Young revealed that repeal would reduce annual GDP by $13.1 billion, annual investment by $7 billion, and annual income by $1.4 billion.

In the hotel industry, like-kind exchanges promote quicker turnover of properties, allowing young entrepreneurs to more easily enter the business. This dynamic keeps our industry vibrant and always evolving, which is essential to a healthy economy.

Tax reform, done correctly, will have a generational impact on our economy and our industry. This is a legacy-defining moment for lawmakers and President Trump. Lower taxes and a simpler, fairer tax code for all of America are within their reach. Join me in urging them to get the job done before the end of 2017, and we can all look forward to continued prosperity and growth for years to come.

 

Chip Rogers

 

About the Author
Chip Rogers is the CEO of the Asian American Hotel Owners Association (AAHOA).

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