Corporate State & Local Tax (C-SALT): Policy Issue
Overview
State and local property taxes represent, on average, 40 percent of the operating expenses of U.S. commercial real estate businesses. In fact, property taxes are a greater expense than utilities, maintenance, and insurance costs combined – all of which have experienced significant increases over the past few years. Such taxes paid by businesses are fundamentally different from state and local individual income taxes. Property taxes are an unavoidable expense, an inescapable cost of operating any business, large or small, public or private.
Some policymakers have proposed eliminating the federal business deduction for state and local taxes. Doing this would be the equivalent of raising business owners’ property tax bills by roughly 40 percent or $0.41 for every $1 of property tax owed. This would make it more expensive for housing providers to build and rehabilitate the rental housing that the U.S. so desperately needs, deeply worsening our nation’s longstanding affordability crisis.
Industry Position
Congress must preserve the deductibility of state and local property taxes. The tax increase that would result in eliminating this deductibility would discourage new investment, deter the construction of much-needed housing, and disincentivize long-term projects.
As an Owner or Operator, How Does this Affect My Business?
Disallowing a deduction for state and local property taxes would artificially inflate and misstate commercial real estate’s taxable income. The tax implications would completely reverse the benefits of the present individual rate structure and Section 199A deduction, recently made permanent by Congress. Further, it would raise effective tax rates on real estate income to 1970s-era levels near 50% and greater. For owners and operators, this means:
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Increased Tax Burdens: Higher effective tax rates could reduce after-tax income, leaving fewer resources for reinvestment in properties, including maintenance, renovations, or development of new rental units.
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Elevated Operating Costs: Expenses for housing providers will rise exponentially, making it harder to maintain or expand housing portfolios, particularly in places where property taxes are already high.
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Higher Rents: To offset increased costs, many housing providers may be forced to increase rents, contributing to housing unaffordability and disincentivizing new affordable housing development.
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Investment Uncertainty: The lack of predictability around future tax treatment may deter long-term investments in multifamily housing projects.
Limitations on the deductibility of state and local property taxes disproportionately affect the multifamily housing sector by reducing financial flexibility and raising operating costs. It is critical that policymakers understand the unintended consequences of limiting deductions on housing affordability and availability.
Contact Information
To learn more about this issue, please contact NAA's Public Policy team.