How Herman Cain’s “999 Plan” would have affected the Commercial Real Estate Market

Author

Ken Wimberly

It was roughly 11 months ago when a former CEO of Godfather’s Pizza came up with a radical new plan to boost our economy by changing our tax structure.  Of course, I am speaking of the famous “999 plan”.  Now we can all breathe easy knowing that we won’t have to learn an entirely new tax system. However, in the spirit of the upcoming Republican primaries, I decided to take a look into our crystal ball and give my best estimate of how the 999 plan would have affected real estate investment.

The beauty of the 999 plan was its simplicity.  In a nutshell, it is a 9% income tax (gross income less charitable contributions), a 9% corporate tax (gross sales less cost of goods sold), and a 9% national sales tax.  The formula maybe basic, but its effects are very complex.  To implement a system so plain, we would first have to discard a system so complicated.  The problem with this lies in our current level of comfort in the complicated system, the loopholes that it provides, and how we take advantage of those loopholes for our own benefit.

Let’s first look at the retail sector.  The main factors here are the 9% corporate tax, as well as the 9% retail sales tax.  The corporate tax was proposed to be calculated as 9% of gross income minus cost of goods sold (cost of goods sold = materials + labor).  Unfortunately, this equation does not factor in overhead.  As a result, we would have seen retailers cut as much indirect cost as they can, including lease payments.  Retail vacancies will skyrocket as larger chain retailers make an effort to consolidate stores. Since overhead is no longer a factor, the definition of profit margin changes and the 9% tax becomes a key factor in that equation.  As a result, retailers who have adopted the model of high volume and low margin will go dark, adding even more vacancies.  The 9% sales tax doesn’t help.  Keeping household income constant, a 9% increase in price will likely mean at least a 9% decrease in gross sales.  To sum it up, retailers forced to cut costs and declining sales will lead to higher vacancies.  Higher vacancies mean lower values, lower values lead to over-leveraged investors, and sTriploon enough we are back in 2008.

Office and industrial will not be far behind retail.  While labor is an expense, constricting overhead will result in loss of jobs, as well as increased vacancies, and we are back to 2008 again.

Multifamily would actually have a positive outlook.  With the 9% income tax, the deductions put in place to incentivize home ownership would be eliminated.  Therefore, when presented with the choice of renting or buying (at the same price), the individual will simply be choosing between a short-term or long-term liability on their balance sheet.  Most will likely choose to rent, and not be tied down to a 30 year liability, increasing demand for multifamily.  Just like there was in 2008.

In conclusion, this plan was meant to take us out of the recession by stimulating the economy, but in my opinion it would have just lead us right back into the teeth of it.  If Cain was elected, I would sprint to the NNN marketplace so that I could have my taxable expenses reimbursed from the tenant.  As a country and an economy, our focus would shift from having a higher after tax income to having a higher gross income.  Overall, I think we would all be better off just limiting government spending and letting the market correct itself.  No matter who gets elected in November, just be happy they don’t have some crazy bar-napkin idea for a tax structure.

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