Ernst & Young: Section 1031 Repeal Would Cost US Economy $8 Billion Annually

Mar 19, 2015

From John Harrison, ADISA CEO/Executive Director
“Comprehensive tax reform” has been the soup du jour in certain circles on Capitol Hill for the past several years, with various members of Congress championing one competing proposal against another.  As momentum for reform builds, Section 1031 exchanges are in the crosshairs of many, including the White House.
Recent legislative proposals to repeal Internal Revenue Code Section 1031 have compelled ADISA and its allies to form the Section 1031 Like-Kind Exchange Coalition to help protect this vital investment tool on behalf of our members and the country. 
Several members of the Coalition, including ADISA, commissioned Ernst & Young to conduct an extensive economic impact study of 1031 exchanges to determine their actual effect on the economy.  The results were compelling. 
Ernst & Young’s report, Economic Impact of Repealing Like-Kind Exchange Rules, concludes that repealing like-kind exchanges would hurt U.S. small business and reduce gross domestic product by more than $8 billion annually (net of the tax revenues)
An excerpt from the study: 
Major Findings:
  • Repeal of §1031 would subject businesses to a higher tax burden on their transactions, resulting in longer holding periods (the “lock-in” effect), greater reliance on debt financing and less-productive deployment of capital in the economy.
  • The cost of capital would be increased, discouraging investment, entrepreneurship and risk-taking, and slowing the velocity of investment.
  • Repealing like-kind exchange rules would slow economic growth, shrink investment, and ultimately reduce gross domestic product (GDP), even if the revenue savings were used to lower tax rates.
  • This negative economic impact would be most concentrated in those industries that rely heavily on like-kind exchanges, such as: real estate, construction, truck transportation, equipment / vehicle rental and leasing.
  • The total effect of §1031 repeal on the ten most impacted industries would be a drop in annual GDP of $26 billion (0.14% of total GDP, see Table 1).
  • The total impact on overall U.S. GDP would be a drop of $8.1 billion each year (Table 2).
On Tuesday, March 17, the Coalition hosted a press briefing in Washington, D.C. to release the results of the Ernst & Young study, and to highlight the real-world impact of 1031 exchanges on small business owners and industry leaders who have relied on the power of tax deferral to grow their businesses. 
ADISA will continue to lead efforts to protect Section 1031 exchanges.  Of course, Section 1031 will command an important place at this year’s Spring Symposium as we begin to galvanize our membership in their defense.
Read the Ernst & Young study synopsis here.