5 Ways the Proposed Tax Bill Affects the U.S. Art World

The proposed tax overhaul could have big consequences on the U.S. art market and museums.

With details in flux even after the Senate votes, the tax plan is being pushed quickly in order to take effect on January 1, 2018. Experts say it heavily favors the richest 1 percent of Americans and corporations -- which obviously benefits top-tier art sales --- and it's paired with provisions that adversely affect many individual taxpayers, along with charities and nonprofit institutions. 

Five ways the proposed tax bill could hurt the art world in the U.S.:

  • Repeal of Section 1031 "like-kind exchanges" when used for artwork. (Long used by collectors and "flippers" who defered capital gains taxes when they sold art and invested in another work, eliminating this provision will likely reduce the volume of art transactions.) 
  • Elimination of the estate tax which is applied to only about 0.2 percent of Americans who die each year, with estates worth at least $5.49 million. It would be phased out by 2024. The losers in this scenario are museums and non-profit institutions (and the public who would have less access to great donated art). Without a need to pay the IRS a hefty estate tax, the wealthiest collectors might not donate artworks to museums or sell works on the market, experts warn. Collectors might simply choose to pass down major art collections to their heirs. “Art is the biggest inter-generational wealth generator that has ever existed in history,” noted art adviser Todd Levin to The Art Newspaper.
  • Loss of tax-deductible charitable contributions. The 100-year-old charitable tax deduction would be limited to the wealthiest 5% of taxpayers. (An incentive for charitable giving for 30 million Americans will be wiped out by the proposed Standard Deduction increase.)
  • Repeal of the historic tax credit. Even though it's a job creator and community-booster, the preservation of historic buildings will take a hit under the plan.
  • Repeal of entertainment, amusement, recreation and membership dues expenses related to a business purpose or meeting.

The nonpartisan Tax Policy Center estimates that charities, including nonprofit arts organizations, could see a staggering loss of up to $20 billion annually under the GOP plan.

"The resulting loss in charitable giving will cause significant consequences for the health of America's nonprofit organizations and the communities we serve," stated the Americans for the Arts group.

"Weakening charitable giving incentives will have lasting, harmful consequences for nonprofit services and U.S. jobs," the American Alliance of Museums wrote in a brief. "With essential support from charitable donations, the nonprofit sector boosts local economies, employing roughly 10 percent of America’s workforce."

Treasury Secretary Steve Mnuchin said the estate tax elimination, “obviously...disproportionately helps rich people.” 

Some market players see this as an immediate boost to the art industry: "A lot of people delay selling their art or transacting in the art market until some event happens, until the estate tax kicks in," Sotheby's CEO Tad Smith told CNBC. "So eliminating the estate tax is a reason to eliminate the delay. So I think it will provide more liquidity to the market."

Just a handful of wealthy art collectors might encounter a new issue, albeit minor. CNBC says: "A clause in the proposed tax plan...would end a loophole that allowed art collectors to enjoy hefty tax breaks by declaring the galleries holding their art collections to be private museums." The bill would require such museums (less than 50 in the U.S.) to be open to the public for 1,000 hours per year.

Here's a sampling of other provisions in the GOP's Tax Cuts and Jobs Act that could affect the U.S. art world:

  • Repeal of the tuition waiver for graduate students, the tuition and fees deduction, and an end to the deduction for interest paid on student loans, a deduction used by some 12 million people in 2015. (Artists and art historians just starting out will be saddled with more debt.)
  • Elimination of the teacher supplies and instructional materials deduction.
  • Elimination of deductions relied upon by salaried Americans. Much is on the chopping block, including state and local income tax (SALT) deductions, a reduced property tax deduction and a much lower limit to home mortgage interest deductions, although the Senate keeps this last one as is, so far. (Scrapping these longstanding provisions punishes taxpayers in 6 states, most notably those living in the populous, productive, high-cost hubs of California and New York.)
  • End (not replace) the Affordable Care Act that requires people to have health coverage. (An estimated 13 million people will end up with no health care, and premiums would go up.) 

The U.S. art market was near-40 percent of a $45 billion worldwide art market (in 2016), reports the TEFAF Art Market Report. About 33,000 high net worth Americans bought art of at least $1-million in the past two years and the GOP tax plan is outlined to benefit this segment of private collectors who are considered the market drivers.

Yet, economist Rachel Pownall, who now oversees the TEFAF report, has noted that there is a bigger picture to look at in the U.S. art market. Earlier this year, from FT: "...a handful of dealers and auction houses dominate, ...30 dealers account for around a third of gallery sales and 20 auction houses for 70 per cent of the public market. Meanwhile, [Pownall] finds that sole traders, who make up around 75 per cent of the US market...are struggling most to make a profit."

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