Congress hasn’t updated the federal income tax code since Ronald Reagan was president, so an overhaul may be in order. But not this overhaul: Both the House and Senate tax plans, as they stand at press time, could seriously harm the profession, the built and natural environments, the working class, and the economy. The AIA did the right thing by opposing both plans (while noting that the Senate’s is marginally preferable).
According to the AIA’s 2016 Firm Survey Report, 57 percent of U.S. practices are set up as pass-throughs (e.g., S corporations). Both the House and Senate offer a new, lower maximum rate for pass-through businesses, but they pointedly exclude professional services such as architecture from the provision. The Senate plan lowers the cap for the mortgage interest deduction from $1.1 million to $1 million, and the House plan lowers it from $1.1 million to $500,000. The latter scenario, in particular, could discourage potential clients from undertaking new-home construction, additions, and remodeling jobs.
The House plan is the more aggressive of the two, cutting items that the Senate retains. At a time of drastic shortages in affordable housing, the House plan ends the tax-exempt private activity bonds that fund roughly half of that market. If the bonds are eliminated, accounting firm Novogradac & Co. estimates that the future supply of affordable housing would fall by some 1 million units—or two-thirds of current production. Also on the House kill-list is the New Markets Tax Credit, which has funded some 178 million square feet of manufacturing, office, and retail space in low-income communities.
The House plan even terminates the incentives for historic preservation. The Senate keeps them, but barely, repealing the 10 percent tax credit for structures built before 1936 and lowering the credit for certified historic structures from 20 percent to 10 percent.
Both plans drop the 179D energy efficiency tax deduction for the installation of high-performance interior-lighting, building-envelope, and cooling, heating, hot-water, and ventilation systems. (According to the AIA, an amendment could reinstate the deduction in the Senate. Keep your fingers crossed.)
A few perks for developers might help architects. “Both bills would allow businesses to deduct interest expenses for property development, construction, management, and other real estate activities, while limiting that same benefit for other industries,” The Washington Post reports. “Another House provision would repeal a ‘like-kind exchange’ exemption that allows businesses to avoid taxes if they reinvest profits from one venture into another, but the bill would preserve the exchanges for commercial real estate. No other types of business would receive such a break.”
According to the Joint Committee on Taxation, the top 0.3 percent get 17.8 percent of the benefit in the Senate plan and 21.6 percent in the House plan. Did the governing class learn nothing from the 2016 election? Shortchanging working families is unjust and unwise, and it’s been occurring for decades, with disastrous results. Instead of tax cuts for rich people and large corporations, the economy needs investment in affordable housing, livable communities, resilient infrastructure, green technology, and well-paying jobs, which are all things that architecture can help deliver.