The BUILD Coalition welcomes the promise of tax reform, but a new tax targeting interest is simply not reform. True reform works to improve the U.S. economy and create jobs rather than raise costs on businesses. Interest deductibility is critical to the U.S. economy. Below are key facts about interest deductibility.
What is interest deductibility?
- Interest deductibility refers to the ability for businesses to deduct the interest paid on debt from their taxable income. For example, if a business owner wants to build a factory, they might raise capital by issuing corporate bonds or taking out a loan from a bank to finance the investment. The interest paid on these loans is a cost of doing business and thus has been 100 percent tax deductible for 100 years.
Why is interest deductibility critical to the U.S. economy?
- Debt is essential for all businesses to finance investments to grow and manage day-to-day operations. It is a normal part of all businesses’ operations.
- Companies of all sizes use debt including 75 percent of start-ups and 80 percent of small businesses.
- All industries use debt including construction, manufacturing, transportation, retail, and professional services.
- All types of companies use debt including proprietorships, partnerships, and corporations.
REPLACING INTEREST DEDUCTIBILITY WITH 100 PERCENT EXPENSING PUTS LONG-TERM GROWTH AT RISK
- 100 percent expensing is not an acceptable substitute for interest deductibility. Instead, 100 percent expensing is a short-term fix with a limited, one-time benefit to the economy. Interest deductibility is a key component of companies’ decision-making that, in turn, drives long-term growth.
- Tax proposals that eliminate interest deductibility in favor of 100 percent expensing will, in the long-run, discourage investment and economic growth on net.
- 100 percent expensing provisions that eliminate or limit interest deductibility only benefit the minority of companies whose capital structures do not require borrowing to finance new investments — you can’t expense what you can’t afford.
- The loss of interest deductibility would make borrowing more expensive for the majority of businesses, both large and small, that rely on credit to fund new investments or meet operating costs; not all credit is used to purchase assets.
What are the consequences of a new tax on interest?
- A new tax on interest will raise the cost of capital for companies, meaning the cost to open a new plant or store, invest in new technologies, and simply manage day-to-day finances will all go up. Higher costs will reduce investment, new business formation, economic growth, and job creation.
- Small businesses, which create two out of every three private sector jobs in the United States and rely on debt financing, will be particularly hurt especially women and minority-owned small businesses, which are more likely to lack other sources of capital.
- Even if revenue from this new tax is used to finance lower tax rates, the end result is higher net costs to businesses, which would likely lead to slower economic growth.
- Interest deductibility is a core component of the tax code going back 100 years and must be preserved in full to help businesses grow throughout the country.