Net Interest Tax Write-Off Could Draw Business Battle Lines in Tax Reform

With tax writers on Capitol Hill weighing specifics of an overhaul package, one of the more contentious fights likely to emerge is over a proposal to disallow companies from writing off the interest they pay on debt.

Eliminating the net interest deduction provision is aimed at leveling the tax treatment of debt and equity, according to the Better Way agenda released in June 2016. The blueprint would instead allow immediate, full expensing for businesses, a provision that supporters say would generate broad economic growth.

But that isn’t going over well with some interest groups — including financial services entities like private equity firms, which often support GOP priorities. They depend on debt financing and say the provision would effectively add an extra tax to their businesses.

In another corner of the financial sector, banks could potentially take a hit if companies decide to borrow less money. Perhaps anticipating this line of criticism, the House GOP blueprint says it will likely treat firms like banks or insurance companies differently from typical businesses under this provision.

The House GOP agenda “is designed to help a wide range of businesses across America,” said Emily Schillinger, communications director for the House Ways and Means Committee, in an email Thursday. “It’s important to look at how all of the elements of the blueprint work together to help these businesses, including lower tax rates.”

Transition rules will play a key role in how businesses implement changes. “We do not expect companies to adapt overnight — and our members will deliver appropriate and thoughtful transition rules,” Schillinger added.

Supporters of the current system argue debt is essential for business growth. That includes firms involved in the Businesses United for Interest and Loan Deductibility Coalition.

“The majority of businesses use debt” in the normal course of business, said Gretchen Perkins, a partner at the Detroit-based private equity firm Huron Capital Partners, in an interview Thursday. Full expensing would help companies that buy lots of capital equipment, she said, but wouldn’t necessarily boost services firms.

Eliminating the net interest deduction would likely be an unprecedented move compared to other nations’ tax systems, said Peter Scheschuk, senior vice president and global head of tax at S&P Global, in an interview Wednesday. “There are many countries that have limitations,” he said, but not outright eliminations. “That would make us an outlier in a negative way … We would strongly encourage some thinking and looking at the proposal from a competitive point of view.”

Still, the business community — including financial services firms — should focus on the big picture of economic growth spurred by full expensing, said former Rep. Phil English (R-Pa.), who served on the Ways and Means Committee and is now a senior government relations adviser for the Washington-based law firm Arent Fox LLP.

“Expensing not only benefits capital-intensive companies,” English said in an interview Thursday. It “also demonstrably improves economic growth which is critical to making tax reform itself a win-win.”

English added that he sees expensing as an area that could draw Democratic support.

The White House will also play a key role in the tax overhaul agenda when President Donald Trump releases his new tax plan. White House spokeswoman Natalie Strom offered no update in an email Thursday on Trump’s tax agenda.

Eliminating the net interest write-off and implementing full expensing are two strands of a larger plan that complement one another, said Eric Toder, institute fellow and co-director of the Urban-Brookings Tax Policy Center at the Urban Institute, in an interview Thursday.

“They really go together, those two aspects of the bill,” he said. “I think if you didn’t allow immediate write-off of expenses, eliminating interest deductibility would be problematic.”

Morning Consult