Despite some signs of recovery, it is clear that in many parts of Ohio, our economy has not yet totally recovered. In particular, the troubling unemployment level and the precarious state of our real estate market--both of which are key indicators on the strength of our recovery--are both still suffering and the latest numbers show unemployment levels above 10 percent and in some counties over 14 percent.
Despite the dismal outlook for the real estate market and the unemployment rate, Congress is attempting to pass the American Jobs and Closing Tax Loopholes Act, which would raise taxes on investment partnerships--like real estate, private equity, and venture capital partnerships--by over 150 percent and hurt prospects for the economy even more. In fact, our own Representative Zach Space joined his Democrat House colleagues in passing the bill, and the U.S. Senate is expected to take up the legislation as early as this week.
Unfortunately, the legislation includes a tax increase on carried interest revenue--taxing it at a much higher income tax rate rather than the current capital gains rate. This change will alter the returns on commercial real estate transactions and would harm the real estate industry, whose recovery is vital to an economic upturn. As the industry is still recovering from the uncertainty of the financial crisis, it simply cannot handle the tax increase, too.
I sponsored and the Ohio Senate recently passed a resolution urging the U.S. Congress to maintain the current capital gains tax rate on carried interest from real estate and other partnerships. We firmly believe that the tax increase would cause the real estate industry to further decline, and would be damaging to jobs and economic growth in general and be one of the first attacks at removing the beneficial capital gains tax rate that investors have come to rely upon.
The American Jobs and Closing Tax Loopholes Act claims to target a "tax loophole" taken advantage of by a few Wall Street fund managers, but this is simply untrue. All investment partnerships rely on carried interest to make a profit and continue to invest across America. In fact, over 1.2 million partnerships, both large and small, own more than $1 trillion worth of commercial real estate nationwide and rely on low tax rates on carried interest to continue build and revitalize our cities and states. The partnership model is the primary business model for development of office buildings, multi-family residences, hotels, and shopping malls.
The carried interest tax increase would reduce the after-tax profits of entrepreneurs and in effect create a disincentive to invest in the risky and rewarding projects that create jobs and economic growth. Fundamentally, the law makes it very difficult for partnerships to raise the necessary capital to invest in the jobs needed to help turn around our stagnant unemployment rate and put more Ohioans to work.
In addition, the carried interest tax increase would result in eroded property values and tax revenues at the local level, further straining local governments who rely on these tax revenues to run our cities and towns. As the non-partisan U.S. Conference of Mayors wrote in a letter to Congress, the tax on real estate partnerships "will lower tax revenues at the federal, state, and local levels and limit opportunities for redevelopment and underutilized properties, hindering job creation." Our cities, county and state budgets have all been stretched thin by the economic recession. Raising federal taxes, which will in turn further depress local tax receipts, would force additional painful cuts to necessary services here in Ohio, all while ignoring the out of control deficit at the federal level.
Our local Representatives in Congress have the responsibility to make choices that help our weakened economy and pass laws that support a tax structure that rewards hard work and success, rather than one that overburdens profitable businesses. By passing a law that taxes real estate entrepreneurs and other investors, the federal government will be enacting policy that would be disastrous in light of our country's current economic situation.
Unfortunately, the U.S. House of Representatives--including Ohio's Representative Zach Space--already made a poor choice by passing a tax increase on carried interest. But it's not too late for Senator George Voinovich (R-OH) and his colleagues to make the right choice for our economy and avoid the unintended consequences of this tax increase in the midst of our economic recovery.