Tax Reform: Allow Choice Between Immediate Expensing and Interest Deductibility
Last November, Americans delivered a clear and important message to Washington, D.C.: Create more American jobs and increase investment in America’s aging infrastructure.
While roads, bridges and other public works projects are obviously important, President Trump has wisely recognized that a successful infrastructure policy must also include steps to stimulate private-sector infrastructure investment and job creation. Accordingly, as President Trump and Congress take steps to modify and reform the tax code, it is important that any changes being considered not undermine these private infrastructure initiatives.
Specifically, many American businesses currently rely on debt to fund infrastructure investments and create new jobs. Companies of all sizes in a variety of industries, including energy, internet broadband, telecommunications, manufacturing, transportation, retail and agriculture, routinely use debt to fund new technologies, build out and maintain infrastructure and hire and train American workers. Like other business expenses, interest paid on debt is an ordinary and necessary cost of doing business and has been tax deductible for over 100 years.
Unfortunately, some tax reform proposals seek to eliminate interest deductibility for businesses in favor of 100 percent expensing — allowing businesses to deduct the full value of capital expenditures in one year rather then spread out over many years.
Eliminating interest deductibility could immediately hinder many businesses’ ability to borrow, thereby impeding infrastructure improvement and expansion, as well as job growth. Small businesses, which create two out of three American private sector jobs and rely on debt financing, would be particularly hurt by any tax plan that eliminates interest deductibility, because they possess limited or no access to equity capital. Similarly, large businesses would need to delay investment to account for a larger tax liability over time.
While 100 percent expensing is a good idea that would help spark economic growth, one idea doesn’t need to be sacrificed in favor of the other. President Trump’s campaign tax proposal offered a wise compromise alternative.
Under his plan, businesses could chose either immediate expensing or interest deductibility, depending upon their particular needs. That would support economic investment and job growth by giving companies at least the choice between interest deductibility and 100 percent expensing. The Tax Foundation has determined that allowing companies to choose between the two options would contribute approximately $120 billion to our economy over ten years.
Going back to the infrastructure issue referenced above, electability between the two options also supports the President’s $1 trillion infrastructure plan, which relies on public-private partnerships, and Congressional leaders’ similar proposals, which include anticipated leverage ratios of up to five-to-one. Limiting interest deductibility could undermine those plans.
Perhaps most importantly, allowing companies themselves to choose between the two options facilitates passage of tax reform because proponents of either option need not be foes in the process.