Lots of Buzz about Tax Reform as We Approach 2018

Although it may seem like very little of the political chatter is about substantive issues, tax reform has become an important issue this year for local, state and federal officials.

In Washington, efforts have begun on the first major rewrite of the tax code since 1986. Although proposals thus far have taken the form of frameworks and broad policy descriptions, the breadth of ideas under discussion are likely to include lowering corporate tax rates, changing the ways that carried interest is taxed, and reducing the burden on pass-through entities.

However, any federal tax reform would carry the risk of increasing the budget deficit, which may impact access to capital for many businesses. Because of the complexity of federal tax reform, it is likely that any action in 2017 or early 2018 would be a first step, with additional reform after next November’s elections.

On the state level, tax reform is benefiting the commercial real estate industry through the repeal of the automatic inflator on the statewide general property tax. Commercial-industrial real estate accounts for nearly all of the revenue from the statewide general property tax, so this change reflects an important step in managing rising tax burdens on commercial real estate.

However, Governor Dayton’s line-item veto of biennial funding for the Minnesota Legislature was accompanied by a demand that the legislature reinstate the automatic inflator. A court case on the constitutionality of the line-item veto remains before the Minnesota Supreme Court. Regardless of the outcome of that court case, it is likely that the repeal of the inflator will be discussed during the 2018 legislative session.

Finally, several court cases limiting the ability of cities to assess fees separate from the property tax system are having an impact on 2018 tax proposals. In St. Paul, Mayor Chris Coleman has proposed a 23.9% increase in the city’s property tax levy, primarily to fill a hole in the budget caused by a reduction in right-of-way maintenance fees.

For NAIOP members, the mayor’s proposal is a both a step forward and backwards. Increased simplicity and transparency in local property taxes are important goals for all local governments – the mayor’s proposal meets these goals. However, since any property tax increase disproportionately impacts commercial real estate, it will be important for NAIOP members to hold St. Paul city council members accountable and look for ways to reduce the cost of city services.