‘The Blood Is All Over the Room’ : Tax Panel, Real Estate Industry Square Off

Times Staff Writers

Earlier this week, when a House Ways and Means Committee working group decided to keep deductions for second homes and maintain certain crucial preferences for real estate tax shelters, Rep. Fortney H. (Pete) Stark Jr. (D-Oakland), the head of the task force, complained bitterly that “I was just outgunned by a real estate lobby that knows no limits to its greed.”

But later, when the committee moved to drastically reduce generous depreciation write-offs for buildings, some lobbyists for the industry who had been gloating just the day before were equally bitter, insisting that they may now aim at killing the tax bill on the House floor.

The extreme reactions illustrate the complexity of determining winners and losers as the Ways and Means Committee moves to drastically reshape the tax code.

And even more important, it conveys the central role that real estate interest groups play in the legislative process.


“No struggle in this committee can match the fight over real estate,” a staff member of Ways and Means said. “The blood is all over the room.”

The reason for such wrangling is simple. More than any other industry, the fate of real estate is directly connected to an unending flow of tax benefits.

“The needle went into the industry’s vein many years ago,” Phil Padgett, a real estate developer here, said in a newspaper interview. “Unless you want to send this country into shock, you better think about how fast you pull the needle out.”

The tax code is so generous to real estate that, on the whole, investors in real estate partnerships not only have avoided paying income taxes on their investments, but they used such tax preferences in 1983 alone to shelter from taxes another $29.5 billion in income.


Indeed, Senate Majority Leader Bob Dole (R-Kan.) recently proposed--only partly in jest--that the industry should simply be exempted from the tax code altogether. The industry was so appalled by the suggestion, Dole quipped, that “three real estate guys fainted in the back of the room.”

As a result, ever since President Reagan disclosed his tax overhaul proposal--which took dead aim at several crucial tax breaks for real estate--the industry has been at the forefront of the interest groups battling to preserve key features of the current tax system.

Real estate political action committees gave $1.28 million in campaign contributions to members of the Ways and Means Committee and the Senate Finance Committee in the first six months of 1985 alone, placing real estate third among all industry groups, behind oil and banking.

Such contributions, backed up by a massive lobbying campaign and heavy grass-roots support from hundreds of thousands of real estate brokers, home builders and tax shelter promoters, helped the industry win key concessions to avoid many of the restrictions proposed by Reagan and Rep. Dan Rostenkowski (D-Ill.) on real estate tax preferences.


But real estate groups, which see themselves as engaged in a never-ending struggle to fend off limits on their tax breaks, also admitted defeat--at least temporarily--on a few issues as well.

“They view this as a war, not a battle,” said Edward C. Maeder, a lobbyist for the International Council of Shopping Centers, “and this is just a skirmish.”

“We won some and we lost some,” said Jay Shackford, a staff vice president at the National Assn. of Home Builders, which represents 135,000 members nationwide.

Among those they lost was a committee decision to stretch out from 18 years to 30 years the period over which the value of a building may be depreciated for tax purposes. Part of the reason that the committee was able to move at all on such issues was that different real estate groups had competing priorities.


“We won on second homes, and we can live with the changes in tax shelter rules,” said a lobbyist for the home-oriented National Assn. of Realtors. “But with the loss on depreciation, all bets are off.”

On the other hand, E. Wayne Thevenot, president of the National Realty Committee, which represents commercial real estate firms, acknowledged that his members generally are satisfied with the trade-offs. “All in all, we could have come out worse,” he said. “We felt if we were going to give something, we could do it through depreciation.”

Committee members said the real estate lobbying blitz was more intense than any other, with the possible exception of the insurance industry’s campaign to keep fringe benefits and whole-life policies untaxed. They pointed out that the industry picked up some unlikely allies.

“You have to remember that most House members have their own second home,” admitted one Democrat on the panel, who insisted that his name not be used. “And even the (International Assn. of) Machinists were insisting that their members couldn’t afford to give up their second homes.”


Real estate lobbyists are exceptionally powerful in Congress because the groups they represent range so widely from big developers to individual realtors, with hundreds of committed business leaders in every member’s district--not to mention millions of homeowners wedded to the mortgage interest deduction that not even Reagan dared tamper with.

“When you organize all these people, you are organizing motherhood and tradition and apple pie,” Stark noted. He said that tax shelter promoters relying on preferences available only to a wealthy few nonetheless “bottle this stuff up and sell it like Coca-Cola.”

When the dust cleared, committee aides estimated that the changes approved by the Ways and Means panel should raise about $14 billion from the real estate industry over the next five years, considerably less than originally proposed by either Rostenkowski or Reagan.

That left real estate in better shape than a lot of other industries, but, given the clout of the industry, most staff members in favor of scaling back tax breaks expressed relief at the outcome.


“It balanced out pretty well,” said one aide. “Nobody is completely happy, but everybody got a little of what they wanted.”