Altus Insight readers are well aware of the low regard in which I hold our current president. There are many people, nearly all people really, with whom I have some level of disagreement with about governmental policy. Being a fiscal conservative doesn’t get you a seat with the popular kids at most lunch tables. And being a fiscal conservative means I disagree with the president on many of his policy choices. My distaste for him runs deeper; planted with rude comments, watered with the way he treats people, grown with his desire for all knees to bow, and harvested with his insistence on being a bully to get his way.
Despite my general disagreement on policy, and my large aversion to his interpersonal skills, I try to view policy on its own merits. I realize that what is reported in most of the legacy media rarely resembles an accurate analysis of most anything he does. Such was the case with the Tax Cuts and Jobs Act of 2017 (TCJA). The news was reporting on how it was a “tax break for the rich,” but government tax receipts rose 48% from 2017 through 2022, while having risen 36% over the prior five-year span leading up to the bill being passed. In fact, some provisions, like the limit on SALT (state and local tax) deductions, effectively raised taxes on high earners in high-tax states—so much so that one of the more contentious debates around the new bill centered on how to roll that back.
If nothing else Trump is a master marketer-hammering home his message in every situation and in a format that is easy to process and remember. We all are familiar with MAGA. And even his legacy media antagonists are referring to the new legislation as the Big Beautiful Bill.
I can’t bring myself to call it that.
According to the Congressional Budget Office it is going to add ~$3 Trillion (WITH A “T”!) to the federal debt over the next ten years. I’m a fiscal conservative! There is nothing beautiful about that! But, so that I’m not like so many other talking heads that pass a quick judgement that fits their political narrative, I will hold off giving my own name to the bill until after a deeper dive into what this legislation really means for investors, for taxpayers, and for the country. Also of note, something that is good for me (i.e. favorable real estate tax treatment) is not necessarily good for the country. I will do my best to differentiate where applicable:
Extension of the 2017 Tax Cuts
No surprise—I’m not a fan of taxes. So, in theory keeping tax rates where they are now is fine by me. But the key question is whether spending is reduced alongside those cuts. In theory, tax cuts lead to higher economic growth which leads to higher tax revenues that can support higher spending, but the economic benefit of tax cuts is not immediate so even flat spending means an increase in deficits until the economic growth can kick in. Unfortunately, during this lag, in almost all cases spending increases, more than offsetting the benefit from the tax cuts. And since government debt has been shown to be a drag on economic growth , without a reduction in spending to accompany the tax cuts, the economic benefits of tax cuts are muted by the economic damage of higher public debt. Of note, the original tax cuts were a benefit to the affluent, and because the 1% pays 40% of all federal tax income against 23% of adjusted gross income, in absolute terms-the biggest benefit of the tax cuts went to the wealthy. Any tax cut across all tax brackets will do this-it is just math. But if you look at the percentage benefit–tax savings versus income earned–the middle class did really well under the TCJA.
SALT Deduction Cap Increase
Prior to 2017, taxpayers were allowed to count their state income and property taxes as a deduction against federal taxation. This was a huge benefit for high tax states, and especially for high income earners living in those high tax states. Effectively it was a handout from the federal government in the form of reduced taxes on the tax payers because of the tax regime of their home state. The TCJA reduced that benefit dramatically, which elicited howls of protest from elected lawmakers from those states, commonly in direct irony to their stated desire to raise taxes. Make no mistake-this part of the TCJA absolutely increased taxation on the “rich”. Pressure from the high tax states continued to ramp up, and to get votes needed for the bill to pass, Trump agreed to increase the SALT limit from $10,000 to $40,000 for a five-year period. That additional $30,000 in deduction equates to roughly $10,000 in tax savings per year for impacted taxpayers. There are roughly 11 million households in the ten highest tax states that this would benefit (making over $200,000 per year), equating to a loss in taxes of roughly $100 Billion PER YEAR, or a half-trillion dollars over the life of this part of the legislation. This is such a massive number I am nervous I got the math wrong.
I strongly supported the original SALT cap. It’s fundamentally unfair for low-tax states to subsidize high-tax ones. This reversal, to me, is a purely political concession—not sound policy.
Debt Ceiling Increase – $5 Trillion
I hardly even know what to say about this. Some Republicans talk about the need to rein in spending, but neither party has shown any desire to do so despite the (now limited) rhetoric. The silver lining? We’ll be spared the faux hysteria over the debt ceiling for a few more years.
Work Requirements for Medicaid and Food Stamps
This continues the efforts originally started by the 1996 welfare reform under Bill Clinton. My wife has considerable first-hand experience as a medical provider in low-income clinics and has shared countless stories of inefficiency and program abuse. I also know there are arguments against this sort of work requirement, but all in all, and as someone who works hard to pay the taxes that in turn support food stamps and Medicaid, I feel like this is a good idea. Though in full disclosure, I didn’t spend any time of consequence on this part of the bill and the implementation devil is in the details.
Cuts to Medicaid and SNAP (food stamps)
I have zero doubts that these programs have a ton of waste. But they also help a lot of people. Alarmists claim that we are going to see a mass decline in true services rendered. DOGE types claim there will be no decline in services because there is so much waste in the system that it can absorb the cuts. The truth is more likely somewhere in the middle, and if I had to guess, in the spectrum more towards the reduction of waste being able to absorb most of the cuts. But I think there will still be some loss of services, which is a big deal. Both societally, and from a real estate investment perspective, most of these benefit recipients are also renters, so a decline in benefits can mean there is less money available for rent.
Opportunity Zones Made Permanent
Insight readers know that I love Opportunity Zones. While I don’t generally like taxation policies that target specific outcomes, IF there is going to be such regulation (and there always will be), I love that this regulation encourages investment (versus handouts) into areas that most need an investment (by definition). It is also supported by members of both parties (and most moderates), which is a good thing. Additionally, changes seem to be a real improvement from the original regulation, though we still must wait until January 1st (assuming the government hits their promised deliverables) for the full details:
- The original legislation had a line in the sand as to when benefits expired. This made participation in QOZs more beneficial early in the process with the benefits waning over time up through the 2026 expiration. But early in the process, the rules kept changing, making it hard to get money placed. The new structure provides for a rolling 5-year period of deferral on gains, plus the same 10-year hold period for elimination of the taxation on gains from the reinvestment.
- There will be a 10% step-up-in-basis on gains rolled into a QOZ investment.
- If the QOZ investment also qualifies as rural, that step-up can increase to 30%. Until we see the final legislation I can’t say this for certain, but based on what was in the past, this could make QOZ investments in various farming operations a lot more attractive. We looked pretty closely at this under the original legislation but never moved forward due to the market at the time (overplanted, strengthening dollar, trade wars). In some areas (Sacramento Valley as an example) there has been considerable price correction so depending on the details in the new legislation this could be something worth exploring again in the future.
- Opportunity Zones were intended to help underserved or under-developed areas-by their very definitions. But there were some shenanigans that allowed for some areas that really didn’t need a redevelopment boost to qualify. While Altus wasn’t involved in shenanigans, Altus investors have benefited from investments located in some of these areas. The new rules supposedly clean that up or at least make the attempt. This may make it harder to find attractive investment opportunities within the QOZ framework, but at least the activity will be focused where it was legislatively intended.
Bonus/Accelerated Depreciation
Make no bones about it, this is a huge win for real estate investors. Invest in something with a lot of chattel (multifamily or retail as examples), mix in a little cost segregation, apply bonus depreciation and voilà!-massive tax advantages. But while I personally will benefit considerably, and while our investors will benefit even further (in absolute), I can’t justify this handout as good governance.
Real estate investment is not the only industry that stands to benefit, but regardless of the industry of benefit, the government is still picking winners and losers, and by providing the winners with tax benefits, the losers are subsidizing the winners. That is how taxes work.
Roll back of Inflation Reduction Act (IRA)
As documented here, I was not a fan of IRA (also referenced here). At the surface level its provisions being gutted or removed could be seen as a good thing. But more deeply, I am highly opposed to administrations pulling the carpet out from previous legislation. People make decisions based on legislation. Those decisions are made under the (now often mistaken) assumption of that legislation being actionable. But when one administration kills actions by the previous administration… The Biden Administration did this by yanking the Keystone Pipeline. Trump is certainly doing this same thing to the IRA.
- If you have clean energy investments in process, or are planning on buying electric cars, etc., it is worth examining the new expiration dates for the tax credits. Electric vehicle credits expire at the end of September with other credits expiring moving forward from there.
Reduce/Eliminated Taxes on Tips and Overtime & $6000 Deduction for Seniors
Grouping these together makes more sense than it may seem at first glance—they’re both transparent attempts to win votes.
- I have always hated the idea that if I work overtime (or two jobs)-which means I am busting my tail-I get penalized by having my take home compensation reduced as the tax rate on the marginal earnings is higher (a function of marginal tax rates). But to just eliminate taxes all together? Or not charge taxes on tips? I totally understand that jobs which include tipping are hard jobs, but so is farm work, so is pouring concrete, or being a leasing agent…the list goes on and on. Shoot, most days my job is pretty hard (with an awful lot of unpaid overtime). It isn’t the norm, but I know several waitstaff that make six-figure incomes, with the vast majority of that being in tips. Those people just won the lottery. And may vote Republican because of it.
- Seniors are a huge voting block. Approximately 28% of voters in the last election were 65 and older, and that block had the highest voter turnout of any age group – over 50% higher than those between 18 – 29. No offense intended to readers of this Altus Insight in that over-65-cohort, but it has been the voting of that age group that has gotten us where we are now with a severely overspending government that has racked-up a massive and accelerating debt load. These same voters, through social security and Medicare are the largest recipient of government spending. Now an additional handout to those same voters? Rough math, this is more than a $36 billion per year benefit, at the expense of other taxpayers (36 million households over 65 * 16% tax rate). And this could be substantially conservative since taxes (and thus tax breaks/deductions) are marginal, and thus it is likely the $6000 deduction will result in a lot more than $1000 in tax savings for filers. Another blatant effort at securing votes, from an age group that Trump DIDN’T carry in the last election.
Estate Tax Exclusion Increase
The new number is $15 million ($30 million for married couple). This isn’t a huge change over the in-place exclusion but is a massive difference versus what it would have reverted to without new legislation. I don’t like estate tax in general because it is a tax on something that was already taxed, at least it would be without the step-up-in-basis provision. That said, this benefit goes to a very small portion of taxpayers who don’t really need the benefit and aren’t going to change spending habits because of it. But it is nice to be able to point to when asking for political donations.
Excise tax on University Endowments
This feels justified. Many large universities behave more like investment funds than educational institutions. Nonprofits are supposed to serve the public good. Endowments have gotten out of control and the taxation isn’t a huge impact. Even for endowments over $2 million per enrolled student, the tax is only 8% on net investment income, far below what taxpayers pay. I am frankly surprised there wasn’t a serious push for the rates to be higher.
Corporate Tax Rate Stays at 21%
I am in favor of this part of the legislation. The more money that stays where it can be reinvested, the better off the economy will be, and the more the economy grows, the better off the participants in the economy. This lower tax rate has more teeth when paired with the tax on share buybacks.
And there is a lot more…
After all, the bill is BIG. So big, it is hard to even really wrap one’s head around it. Like any bill there is good, and there is bad. And we may not agree on which is which.
So What Does It All Mean?
- The “cost” of the bill isn’t really the $3.4 Trillion (+) that has been reported. That assumes all TCJA provisions would expire while growth continued. The increase in costs versus the current policies is much smaller – by some estimates less than $1 Trillion; still enormous, and still a missed opportunity to reduce national debt. In this I stand with Elon.
- My personal tax situation just got a lot better. My guess is most of our readers also just saw their personal tax situation improve as well. Even against the 2017 Jobs Act backdrop.
- Real estate will see some benefit but could also experience some negative impacts. Some of the benefits will very much require a concerted effort to achieve (i.e. new QOZs) while the negative impacts could be more widespread. Overall, I would call it a slight benefit to real estate.
- The Tax Foundation calculates the economic benefits of the bill will increase economic growth by 1.2% over the next ten years. That’s good—but they also estimate an even larger increase in the deficit than the CBO does.
- I, and more likely my kids, will have to pay this debt in the future. Some of that future payable is offset by today’s tax savings. Unfortunately, I think most of it is not.
We don’t have to like it. I certainly can’t call it “beautiful.” But it’s here-and at least until 2029, we’re stuck with it. So we might as well understand it, adapt to it, and maximize the advantages while we can.
Happy Investing.
1 Per Statista.com
2 “This Time is Different” – Reinhart and Rogoff
