Wednesday, July 26, 2017

TAX REFORM | GOP Working on House Bill for Friday

The following, with a few paragraphs lightly edited, is from an email sent to me by Dana Chasin, and is posted here by permission. Some commentators think a tax reform bill will be taken up in the fall and passed in 2018.

Whether to maintain or eliminate the business interest deduction is a point of dispute among the Secret Six Republican tax planners. The 2016 House Blueprint for Tax Reform proposed eliminating the deduction. Steve Mnuchin said he preferred that the deduction be maintained, pitting the Secretary against at least two of the Secret Six members – Paul Ryan and Kevin Brady.  

Eliminating the interest deduction for business could generate $1.2 trillion in gross (not net) revenue over ten years. The White House is opposing the provision, as are major national business groups.

Business Interest Deduction

Eliminating the deduction would unhinge a founding doctrine of American tax policy.   Since the enactment of the federal income tax in 1913, businesses have been able to deduct all interest expenses on borrowed capital. To compensate for the revenue loss, the federal government taxes lenders on interest receipts. 

The problem is that interest is often received in tax-preferred forms, such as retirement plans, often effectively escaping taxation. So eliminating the deduction is not calculated to accomplish any fiscally oriented policy objectives for the GOP.  

$Trillions at Stake

Ending the business interest deduction could generate around $1.2 trillion over ten years according to the conservative Tax Foundation.  Note that this is not a net figure -- the amount would not come close to offsetting the $2 trillion that would be lost from reducing individual income tax brackets to 12, 25, and 33 percent. 

The Democratic “Better Way”

Democrats could be persuaded to see a future for eliminating the deduction, provided it simplifies the tax code burden in a progressive fashion.  Given the current environment and the Republicans’ need, in some circles, to find revenue, it’s unlikely that the Republicans will see fit to suggest anything the Dems would consider equitable reform.  But since deficits don’t seem to matter, we’ll probably see this fall to the cutting room floor after some debate. 

The Ryan-Brady wing of the Secret Six has advocated for the elimination of the deduction since releasing the “Better Way” agenda.  They intend to make up for the hit to business by allowing for 100 percent expensing of business investment in the first year.  Allowing immediate expensing and denying interest deductions is a large step toward turning the corporate income tax into something more akin to a consumption tax. This would replace a system in which businesses depreciate assets over useful lives prescribed by law. Despite this, their plan is out of step with American businesses.

Business Opposition

The Businesses United for Interest and Loan Deductibility (BUILD) Coalition has informed both the Senate Finance and House Ways and Means that it opposes eliminating the deduction. The coalition, mostly farmers and small businesses, emphasizes the important role borrowing plays in fueling their operations. The deductibility of interest lowers the cost of such borrowing.

The coalition also takes issue with the second plank of the Ryan-Brady plan: 100 percent expensing of first-year business investment. The coalition argues full and immediate expensing is redundant, as small businesses are already able to expense annual expenditures. Overall, the coalition insists the policy would raise the cost of capital and reduce investment over the long run.

Additionally, interest deductibility is a key component of the business model of real estate developers, who would be expected to oppose such a change in the law.

Where the Six Stand

Steve Mnuchin’s business background ought to incline him to preserve the deduction.  During a Ways and Means Hearing earlier this year, Mnuchin testified: “On the business tax, my preference is to maintain interest deductibility, which is important for small- and medium-sized businesses."  He went on to say that eliminating this deduction, like others, remains on the table despite the controversy.  

With Steve Mnuchin, Paul Ryan, and Kevin Brady’s views on record, what is known regarding the remaining Secret Six members' approach to the deduction?

•  NEC Chair Gary Cohn: Cohn holds the same view as Mnuchin.  On May 9, they both met with Republican senators and expressed their desire to maintain interest deductibility. Their unity means Trump likely supports keeping the deduction. 

•  Sen. Orrin Hatch, Chair of Senate Finance:  Sen. Hatch’s stance on the issue is unclear.  He has stated in the past that the Congress may not reconsider the deductibility of interest expenses, but said he was open to re-evaluating the question. Early this month he said: "Some people think that would be a tremendous move in the right direction, on both sides . . . I can see it one way, and I can see it the other way, too. These are tough issues. There's nothing easy about tax reform."

•  Sen. Mitch McConnell, Majority Leader: McConnell’s stance on the issue is unclear. He hasn’t come out for or against the deduction. The most he’s said when referencing it is: “There are going to be critics of any way you try to provide revenues to buy down rates.” 

Friday and Beyond

House GOP tax writers are weighing middle ground options between the total elimination of the business interest deduction and its preservation.  An interest deduction may be kept for farmers and small businesses.  

House Ways and Means Tax Policy Subcommittee Chair Peter Roskam says he is "actively working" on how to define which small businesses and farmers would be allowed to keep their interest deductions while taking advantage of the expensing provisions in the tax reform bill that Ways and Means is working on. 

There is also the possibility of a “haircut” for interest deductions, say with 20 percent of net interest not allowed as a deduction.

It is not known if opposing or undecided members of the Secret Six will sign on to these approaches. If you’re anxious to know just where the Secret Six stands on this deduction and all the other important elements of tax policy, stay tuned – you will find out more on Friday (July 28) regarding the big recess reveal.

Dana Chasin is a fiscal and financial policy advisor who has worked in legislative and advocacy capacities in Washington and for investment banking and financial not-for-profit organizations in New York. Mr. Chasin was Legislative and Policy Liaison to Congress and the Obama administration at Americans for Financial Reform (AFR), a national coalition supporting comprehensive financial regulatory reform and as a member of the AFR Too Big to Fail Task Force. Previous to joining AFR, Mr. Chasin was Senior Advisor at OMB Watch, a non-profit, non-partisan think tank in Washington, researching and advising on federal fiscal policy. He previously served as Legislative Assistant for U.S. Senator Mark Dayton, covering judiciary, tax, budget, and banking issues. He spent six years as Vice President in the global Project Finance team at Société Générale, the international investment bank. Mr. Chasin has published op-ed articles in the Wall Street Journal, Newsweek, and the Christian Science Monitor.