Capital Gains Taxes
AH&LA supports the lowering of capital gains tax rates to increase the flow of investment into the lodging industry.
Many hoteliers - particularly those who have owned their property for many years - find themselves in a difficult tax position when they wish to sell their property and enjoy the fruits of their many years of hard work. The value of their property has appreciated significantly while their cash flow has remained static. The result is a situation in which they do not have the resources to improve their property, or even to maintain it as they would like, but face very high capital gains tax bills if they sell.
The Taxpayer Relief Act of 1997 cut the personal capital gains tax rate from 28 percent to 20 percent for assets held longer than 18 months, and to 18 percent for assets acquired after the year 2000 and held longer than five years. AH&LA lobbied for capital gains tax relief in this legislation. Depreciation recapture for real estate is now at 25 percent. The corporate rate remains at 35 percent.
After President Bush’s election in 2000, Congressional Republicans felt confident about tax relief being enacted under his administration and pushed for tax rate changes in 2001 and 2003. The Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003 set the taxes for qualified dividends at the same rate as taxes for long-term capital gains. Before JGTRRA, the average dividend marginal tax rate was 28 percent, or almost twice that of the current long-term capital gains tax rate of 15 percent.
On December 31, 2010, the low tax rates on capital gains and dividends enacted in 2003 will increase from 15% to 20%. Many economists agree that the expiration of these tax cuts will discourage investment and slow economic growth. The United States already has one of the world’s highest capital gains tax rates.
Higher taxes on capital will hinder the growth of investment and capital stock. The decrease in capital will reduce economic growth, which will lead to higher unemployment and reduced personal income. Tax rates should not be a determining factor in allocating investment dollars when hotels seek to tap into the capital market for business expansion.
Further lowering the capital gains and dividend income tax rates, or making these cuts permanent, will spur investment activity, create jobs, and expand the overall U.S. economy, benefiting individuals of all income levels.
Republican House members in April 2008 said they would force a vote to make the current tax rates permanent and to put Democrats on the record heading into the November elections. However, the Democrats in the House have procedurally blocked numerous attempts by Republicans to add any extension of tax rates to legislation. The last attempt was in May 2008 on H.R. 6049, which extended dozens of other tax breaks and was passed by the House. However, Democratic Senate leadership has been successful since then in blocking any Republican effort to amend legislation to make permanent the 2003 tax rates, including not being able to reach the 60-vote margin necessary when H.R. 6049 was brought up for a vote in late July 2008.
The scheduled expiration of the 2003 tax cuts at the end of 2010 will alter future investment decisions, slow economic growth, and reduce personal income. Because the economy would suffer if the tax rates are increased, Congress should act now to make permanent the existing tax rates for capital gains and dividends.
The 2001 and 2003 tax cuts will expire at the end of 2010 unless Congress acts to extend them. Congress should act quickly to make the tax cuts permanent and then pur¬sue additional pro-growth tax policies.
AH&LA will continue to support legislative initiatives that include capital gains tax relief in the 111th Congress. Since the 111th Congress began in January 2009, no capital gains tax relief legislation has moved out of committee.
For more information, contact AH&LA's Senior Vice President for Governmental Affairs Shawn McBurney at (202) 289-3123,
smcburney@ahla.com.
(Updated July 2009)