The Businesses United for Interest and Loan Deductibility (BUILD) Coalition, a group representing large businesses and trade organizations, sent U.S. Sen. Orrin Hatch (R-UT) and other Senate Finance Committee members a letter urging them to retain the federal tax deductions for interest paid on businesses’ debt.
The BUILD Coalition letter, sent on July 5, calls on the Senate Finance Committee to preserve the net interest expense deduction, an annual tax deduction for interest paid on loans.
Eliminating the deduction and allowing companies to fully expense capital investments in a single year are two tax reforms included in the U.S. House Republicans’ “Better Way” agenda offered in 2016 by Rep. Paul Ryan (R-WI) as a recommended campaign platform for candidates.
One Piece of the Puzzle
Alexander Hendrie, federal affairs manager for Americans for Tax Reform, says removing the debt deduction may sound like a tax hike, but it is part of a larger tax relief plan.
“As a standalone provision, denying deductibility of interest would be a tax increase,” Hendrie said. “The plan makes multiple changes to business taxation. The reasons they make both of these changes are to pay for it, but … the current tax treatment of interest payments creates this unequal tax treatment between debt financing and equity financing.”
Win Some, Lose Some
Taken as a whole, the plan will reduce business owners’ tax burdens.
“This is a net tax deduction, but it would impact some businesses more than others,” Hendrie said. “By moving to disallow deductibility of interest, you have some companies that rely on that a lot. The tradeoff that has been linked there is the immediate depreciation of new investments. For businesses that don’t have that kind of capital-intensive structure, they might be worse off under that direct tradeoff.”
Influencing Businesses’ Behavior
The current federal tax code encourages businesses to accumulate debt, by giving indebtedness better tax treatment than other choices, says Gordon Gray, American Action Forum’s Director of Fiscal Policy.
“The current tax code subsidizes companies to take leverage above and beyond what they would otherwise do, because it’s tax-preferred,” Gray said. “The current tax code undeniably, unquestionably favors companies taking on debt to invest.”
All or Nothing at All
Tax reform must done all at once, or the changes will create even worse problems, Gray says.
“All else being equal, if you just got rid of the deduction, you’d have a huge tax increase, which I would not be in favor of,” Gray said. “Goosing taxes is certainly not my idea of pro-growth tax reform.
“Moving to immediate expensing, in and of itself, is tremendously pro-growth, but when you think about it with respect to interest deductions, there’s an interesting and important interplay,” Gray said. “If you retained the current interest deduction and you moved to full expensing, you would take that current negative tax subsidy and jack it up tremendously.”
