As House Ways and Means Committee Republicans enter the second day of their two-day retreat to discuss how to align their tax plan with the White House’s principles, they must remember the role interest deductibility (ID) plays in facilitating business growth.
The stated goal of the tax reform effort is to foster stronger business investment that will propel our economy forward. Proposals that allow for the elimination of interest deductibility run counter to that objective and hinder the economy’s ability to expand and add jobs. A study conducted by Goldman Sachs Economics Research found that removing ID from the tax code would raise the user cost of capital and reduce investment in the medium to long run.
Businesses of all sizes and across sectors use credit financing to fund growth and operate, and would be severely penalized by eliminating ID.
· Utility companies, which make substantial investments in transition lines and power plants, could see earnings hits as high as 8.5 percent according to Morgan Stanley, most likely leading to an increase in energy costs for Americans across the country.
· Community banks are seriously concerned with the impact eliminating ID would have on their thousands of small- and medium-sized business customers.
· Farmers and ranchers, who rely heavily on debt financing to pay for land and equipment costs, would be slammed by higher taxes. It’s no wonder Rep. Steve King, (R-Iowa) called eliminating ID a “hare-brained idea,” and Rep. Bob Gibbs (R-Ohio) referring to it as “ludicrous.”
Investment in America’s roads and bridges will also take a major hit. The latest White House infrastructure plan expects more than $800 billion worth of funds to come from the private sector, most of which will be in the form of debt financing. Removing ID will make it especially difficult for the private sector to finance those investments, especially when interest rates are expected to rise 2.25 percent.
Policymakers are committed to igniting stronger economic growth. Full interest deductibility in the tax code will be central to encouraging greater business investment.