WASHINGTON ― Rich people are literally buying themselves tax cuts through phony land deals, but Democrats are hesitating to put a stop to it.
The first version of the Build Back Better Act included a crackdown on so-called “syndicated conservation easements,” but Sen. Kyrsten Sinema (D-Ariz.) insisted it be removed, two sources with knowledge of the negotiations told HuffPost.
The House passed a version of Build Back Better without the limitation on the dubious deductions, but the Senate hasn’t moved on the bill, and Democrats from each chamber are still haggling over several provisions.
Top Democrats told HuffPost they might be able to bring back their ban on the tax bonanza.
“These types of conservation easements, some of them are the shadiest of the shady transactions,” said Sen. Ron Wyden (D-Ore.), chairman of the Senate Finance Committee. “We’re working hard to get all the senators on board.”
Both Wyden and Rep. Richard Neal (D-Mass.), chairman of the House Ways and Means Committee, declined to single out Sinema, though they both described a lack of support among all 50 Senate Democrats as the obstacle.
“The reality is we’re dealing with 50 presidents, and so they have a disproportionate influence on the outcome,” Neal said. “But I also think that there’s still a ways to go here in terms of policy matters, so there’s still an opportunity.”
The fight over this particular deduction, which amounts to a relatively tiny amount of lost revenue, is a microcosm for the broader battle within the Democratic Party over taxes. For years, Democrats have campaigned on making the wealthy pay their “fair share,” but now that they’ve got the chance, they’re hesitating. And Sinema is a big reason why.
Sinema most notably refused to support higher tax rates, forcing Democrats to scramble for alternative tax ideas. All year she has drawn attention for her dramatic splits with the rest of her party and her affinity for bipartisanship.
But unlike higher tax rates, the conservation easement loophole is so egregious that even some Republicans support changing the law.
“... participants have included doctors, lawyers, small-business owners, large-business executives, professional athletes, rock stars, entertainers, and other celebrities ...”
- The Senate Finance Committee on who invests in syndicated conservation easements
The transactions work like this: a promoter solicits high-earners who want lower taxes for participation in a business entity that purchases land for the sole purpose of selling tax deductions. The entity then places a conservation easement on the land ― a promise never to build there ― and donates the tract to a nominally charitable organization. Because such donations are tax deductible, the investors then get to reduce their taxable income by the value of their share.
The trick is that the conservation easement deductions are typically worth four times more than what the investor paid, thanks to sketchy appraisals based on how valuable the property could be, if, say, a gigantic condominium were developed on it. So the investors get a deduction so big that it ultimately reduces their tax bill by a sum larger than their actual investment, meaning they turn a profit on what was ostensibly a charitable donation. The IRS regards it as a perversion of tax policy ― deductions are supposed to reduce taxable income, not actually pay people money.
In 2016, the IRS put taxpayers on notice of the scheme’s dubiousness, announcing that syndicated conservation easements were clear tax avoidance strategies that had to be disclosed to the IRS.
Four years later, the Senate Finance Committee, then-chaired by Sen. Chuck Grassley (R-Iowa), published the results of a bipartisan investigation into the practice, likening the easement deals to “Dollar Machine” vending machines that pumped out $2 for every $1 someone put in. Promoter emails that the committee obtained through subpoenas showed that nobody involved in the transactions had any interest in actually conserving land. Grassley called it a “scam.”
As for the investors? Some of them were literally rock stars, though the committee withheld their identities. “Those participants have included doctors, lawyers, small-business owners, large-business executives, professional athletes, rock stars, entertainers, and other celebrities, most of whom appear to reside or work in the southeastern United States,” the Finance Committee wrote.
The senators also introduced legislation disallowing deductions worth more than 2.5 times the taxpayer’s original investment. Democrats ultimately adopted the measure as part of Build Back Better, getting $12 billion from it over a decade.
Bloomberg Tax first reported in October that Democrats had dropped the conservation clampdown from their bill.
Grassley told HuffPost Democrats ought to bring it back.
“Democrats aren’t going to listen to me on that,” he said, “but if they listen to Wyden, that’d be okay with me.”
Sinema’s office did not respond to requests for comment. She has said that hiking tax rates won’t help with the problem of tax avoidance ― but clamping down on shady deductions certainly would. It’s not clear what tax principle would lead her to oppose the measure.
Rep. Mike Thompson (D-Calif.) has introduced bills targeting conservation easement abuse since 2017. He said he’s not sure what about the proposal has offended whoever it has offended over in the Senate. He declined to name names.
“A particular senator had a concern with it and I’m planning to talk to that senator this week,” Thompson said. “We don’t want to stop conservation easements, we just want to stop this idea that you can go out and buy one and turn it for a profit.”
The vast majority of conservation easements come from individual donors rather than syndicated investors. Congress has used tax incentives to encourage land donations for decades, and experts say the practice has been a “critical tool in protecting environmentally and historically important land.”
Many of the investors in syndicated conservation easements are already under audit by the IRS, and some of the promoters who arranged the schemes have been prosecuted.
It’s possible that even if Democrats wind up omitting a limit on the deduction from the final draft of their bill, it could get added through a bipartisan amendment process in the Senate. Sen. Steve Daines (R-Mont.), one of the easement bill’s Senate cosponsors, said he would vote for it.
As for why Democrats would shy from limiting the deduction, Daines likened it to the effort by some Democrats to repeal a limit on deductions for state and local taxes, which would overwhelmingly benefit homeowners in states like New York, New Jersey and California.
“It’s going to help the wealthy elites on the East and West Coast,” he said. “It’s liberal [campaign] donors that are screaming loud.”