CAPE ELIZABETH – Despite signs of recovery, the economic outlook remains dismal.

The unemployment rate in Maine is nearly 9 percent. Nationwide, almost half of the unemployed have been searching for a job for six months or more, and the real estate market has not yet recovered from the liquidity and refinancing crisis.

Congress passed massive stimulus bills and bailout packages, but these bills alone will not create sustainable, long-term growth.

The key to economic recovery is job creation, particularly in the commercial real estate market. However, Congress is on the verge of passing a bill that would hinder the ability of the real estate market to continue to develop and invest.

The American Jobs and Closing Tax Loopholes Act as it passed the House recently contains a tax increase on the general partners in real estate investment partnerships by more than 150 percent.

As commercial real estate markets both in Maine and across the country continue to struggle — lagging behind other sectors of the economy — this is a tax increase the industry simply cannot afford. According to the National Association of Realtors, property prices, sales and demand have decreased significantly, while vacancies and rent reductions are rising.

The sponsors of the bill say it targets a “loophole” enjoyed by Wall Street fund managers. Basically, the bill proposes treating real estate investment earnings — known as “carried interest” — as regular income rather than as long-term capital gains, meaning the tax rate will be 35 percent instead of 15 percent.

However, the tax increase will be detrimental to the profitability of all investment partnerships, as well as the businesses and real estate properties in which they invest.

The increase will raise the tax rate for real estate, private equity, and venture capital partnerships to nearly 40 percent, and will hit the struggling real estate industry the hardest.

Over 1.4 million real estate partnerships invest in more than $1 trillion worth of commercial real estate, which results in jobs and economic growth for the surrounding cities and counties. It’s crucial that these partnerships are encouraged to continue to invest, as they are the primary business model used in the development of properties like apartment complexes, office buildings and shopping centers.

The U.S. Conference of Mayors — a non-partisan organization representing more than 1,200 cities — is one of many organizations that has opposed the tax increase on carried interest. In a letter to Congress, the group explained that this tax would “lower tax revenues at the federal, state, and local levels and limit opportunities for redevelopment and underutilized properties, hindering job creation.”

Having worked in the commercial real estate sector for 15 years, I agree. I develop commercial real estate properties across Maine, and I know that the state’s real estate market would be significantly harmed.

The proposal creates a disincentive for investors to take economic risks on the investments that are critical to economic recovery and growth. Furthermore, given the eroded property values and tax values we are seeing as a result of our current deflationary environment, this legislation will negatively affect the municipalities that depend on those new tax revenues.

Lawmakers need to realize the importance of enacting policies that will create long-term economic growth.

Instead, Congress is trying to enact policy that will discourage the investments needed to strengthen the real estate market and the economy as a whole.

We need to tell our senators to vote against this bill, before we destroy the seeds of progress made in our economy during this difficult time.

 

— Special to The Press Herald