Tax reform sparks hope, mild skepticism for hotel execs
Tax reform sparks hope, mild skepticism for hotel execs
09 OCTOBER 2017 8:21 AM

Tax reform has been on the wish list for the U.S. hotel industry for years. Now that there’s a proposal on the table, hotel executives share what works for them and what they’d like to see changed.

REPORT FROM THE U.S.—Hoteliers have been anxiously awaiting a change to the U.S. tax code, hoping elected officials would keep their campaign promises to simplify the code, make it more business-friendly and provide breaks for the middle class to increase their disposable income.

After months of talks, teases and failed attempts to repeal and replace the Affordable Care Act, President Donald Trump’s administration and members of Congress have proposed a plan they say will fix the country’s tax code.

Hotel News Now reached out to hotel owners and managers to get their impressions on the proposal and what, ultimately, they hope comes from it.

Promising developments
Douglas Dreher, president and CEO of The Hotel Group, said the proposal is framed in a way that should help businesses to grow the workforce. Three out of five hotel companies are small businesses, he said, and many aspects of the unified tax-reform framework would benefit small businesses and the middle class.

Other benefits of the plan include a reduction of the corporate tax rate, which Dreher said would make the U.S. more competitive internationally; and the expensing of capital investments, because CapEx is “a huge part” of every hotel, one way or another. The one-time low tax rate on profits from overseas is another important aspect of the proposal, he said.

Navin Shah, chairman of Royal Hotel Investments, also sees positives in the plan. The most important, he said, is the elimination of double taxation on companies that do business overseas and pay taxes to both the U.S. and foreign countries.

“Let’s make it more economically attractive for American companies to bring money ‘home,’” he said. “This tax change would free up billions of dollars that are now sitting unproductively overseas, but instead would be invested here.”

Lowering the tax burden on consumers and businesses will boost economic growth, said Rob Hays, chief strategy officer at Ashford Inc. Hotel demand is highly correlated to overall economic growth, he said, so the proposed tax reforms should help the industry.

“Lowering corporate tax rates and allowing for the immediate expense of investments in depreciative assets will allow businesses to be more profitable and grow, which should lead to increased business travel,” he said. “Lowering middle class taxes should also improve spending and leisure travel.”

It appears that the border adjustment tax has been dropped from the proposed plan, said Raymond Martz, EVP and CFO of Pebblebrook Hospitality Trust.

“This would have been a negative for the travel industry because it would have created another headwind for international inbound travel demand,” he said.

Mike Hines, chairman of HP Hotels, said he’s on board, for the most part, with the plan.

“The most interesting part to me is the elimination of the tax brackets,” he said. “Consolidating from seven to three is the first step in having a flat tax for the country, as proposed by Forbes many years ago. While some consider this regressive tax reform, I think it is a simplification.”

Room for improvement
The proposal doesn’t address how specialty tax structures, such as real estate investment trusts and private equity, will be treated, Martz said. The lowered tax rate for C-Corps will change the cost/benefit for these structures, he said, but it’s unclear if this will carry over to REITs.

“How will the new tax plan change the double taxation on corporate earnings?” he asked. “How will the proposed changes on the deductibility of interest expenses shake out? These are all very complicated issues that will be heavily debated on both sides, and a lot of details haven’t been provided.”

Hines called for one adjustment to the plan: Lowering the capital gains tax to the 15% proposed during campaign season.

“I don’t know how, with the cuts and the deficit continuing to grow, we will be able to maintain the proposed structure without a major overhaul in the future, and would like more federal programs and grants to be revoked to see if they are necessary,” he said.

Interest expense deductions for businesses should not be reduced, Hays said. Companies use credit to grow their businesses, he said, and interest expenses should not be treated differently than operating expenses.

“A reduction in this benefit may cause credit to contract, reducing spending and investment, which would be detrimental to economic growth and job creation,” he said.

Shah said he’s not a fan of tax breaks for the “super rich.” While he understands the argument for these breaks is that the wealthy can invest their tax savings to stimulate growth, the optics aren’t good and the logic of lowering taxes for the wealthy is not easily understood by most people, he said.

“We should provide a big tax break to the middle class,” he said. “For me, that means families of four who earn less than $50,000 a year. This group of Americans keeps the country going and growing with their spending, so a significant tax break helps both the families and the country. It’s common sense for the common good.”

One concern that Dreher said he hasn’t seen addressed yet is what effect the proposed tax reform would have on the national debt. If any provision affects revenue, it needs to be paid for somehow, he said.

“Unfortunately, I don’t think that’s really in the forefront of the administration or Congress at this time,” he said.

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