The $1 trillion infrastructure spending plan pledged by President Donald Trump may face a roadblock if Congress passes a comprehensive tax overhaul plan, Bloomberg reports. House Speaker Paul Ryan has advanced a sweeping blueprint for corporate tax reform that would, among other things, eliminate the deductibility of interest expense. The rationale for this provision is that the current tax code favors the issuance of debt versus equity by corporations, and thus promotes excessive leverage in the economy.
Republicans and Speaker Ryan are now expected to focus quickly on tax reform, including the deductibility issue, after abandoning their effort on Friday to replace the Affordable Care Act after failing to win enough support in the House.
While Trump has yet to offer specifics on exactly what his infrastructure plan will encompass, he has stated a strong desire for it to include "both public and private capital," Bloomberg says. However, much of that private capital normally would be raised by contractors and investors through bank loans and bond issues, and killing the deductibility of interest would increase funding costs and lower returns on investment dramatically. That would probably reduce the private sector's participation in any Trump effort to rebuild America.
Eliminating the tax deductibility of interest expense is expected to raise federal tax receipts by a cumulative $1.2 trillion over ten years, making it the biggest revenue enhancer floated by House Republicans, according to Bloomberg. Not surprisingly, industries that are heavily dependent on debt finance are lining up in opposition, including utilities and real estate developers, among others. An umbrella lobbying organization called Businesses United for Interest and Loan Deductibility, or BUILD, has been formed to fight the tax plan.
BUILD's position is that this is a massive new tax that "would harm the economy by raising costs on all businesses, which would reduce investment and growth," as stated on their website. Moreover, BUILD spokesman Brai Odion-Esene told Bloomberg that, as interest rates rise, the private sector would have a rapidly diminishing rationale for investing in infrastructure projects, absent the interest expense deduction. Banks, which are major lenders to the construction industry, also have much to lose if the deductibility of interest expense goes away as they pay a huge share of their operating profit to cover interest expenses.
Partially offsetting the effects of eliminating the interest expense deduction, the House Republican tax plan calls for immediate expensing of investment in assets, replacing the current system under which these deductions are spread over time according to depreciation schedules, Bloomberg adds. Some experts note that an important alternative is not being actively discussed, though it addresses the issue of favorable tax treatment of debt. That would be to keep the interest deduction for debt, but allow equity dividends to be deducted for tax purposes, thus eliminating the double taxation of dividends, a longstanding bone of contention among investors. But this step could leave less room for cutting corporate income tax rates from their current 35% average, a priority of President Trump. (For more, see also: Investors May Have to Settle for "Tax Reform Lite.")