A congressional panel last week spotlighted how federal tax reform could help small businesses, but one possible component of the GOP reform plans would cost businesses an estimated $1.5 trillion over the next decade.
Though a hearing scheduled Thursday by the Tax Policy Subcommittee will highlight how tax reform could strengthen economic growth nationwide, one major piece of the reform effort would end the deduction for interest businesses pay on debt financing. Some of the Republican tax reform plans under discussion in Congress would also help offset that revenue boost with immediate write-offs on capital investments in a bid to encourage business expansion.
Other ideas include slashing the top federal corporate tax rate of 35 percent.
Business reactions to the tax proposals will likely vary markedly by industry and region, depending on the composition of a state’s economy, according to tax policy experts contacted by Watchdog.org. Businesses in states with a large presence of both manufacturing and agriculture, such as the Midwestern states of Ohio, Illinois and Wisconsin, may have especially divergent opinions.
“Farming is 95 percent debt-financed,” Patricia Wolff, senior director for congressional relations at the American Farm Bureau, told Watchdog.org. So losing the business interest deduction would have a huge impact on farmers and ranchers, according to Wolff.
In addition, many farmers already qualify for small business exemption limits for expensing farm equipment, she said. The farmers under that exemption can now write off equipment expenses such as tractors or combines up to $500,000, according to Mark O’Neill, a spokesman for the Pennsylvania Farm Bureau.
Farmers like the idea of being able to write off such expenses during the current year, rather than take depreciation amounts over a period of several years, O’Neill said.
“Under existing law, basically farmers are allowed to legally depreciate farm equipment over seven years,” O’Neill told Watchdog.org. One compromise proposal would reduce that depreciation period to five years to help agricultural businesses, he said.
“In the last couple of years, farm income has been way down,” O’Neill said.
The American Farm Bureau opposes ending the business tax deduction, even if paired with tax advantages on expensing, according to Wolff.
“We’re very concerned about that,” she said. “It’s one of our top-tier issues.”
The Farm Bureau is now making its positions known in Congress and waiting to see what the final congressional tax package will look like, Wolff said. House Ways and Means Committee Chairman Kevin Brady, R-Texas, has acknowledged that small businesses and family farms have limited access to capital for borrowing, and he may include tax provisions that recognize the need to borrow to obtain additional farmland, Wolff said.
“We’re hoping that when the legislation is introduced that it will be helpful to farmers,” Wolff said.
Manufacturers, whose revenues figure prominently in states like Illinois, Ohio and Pennsylvania, may view the combination of limiting business interest deductions and providing immediate write-offs for capital expenses more favorably, according to Joseph Rosenberg, a senior research associate with the Urban-Brookings Tax Policy Center in Washington.
In states with large manufacturing operations, the reforms would help manufacturers that have a lot of capital expenditures, such as longer-lived assets such as structures, Rosenberg said. But even so, the swap with ending the business interest deduction will likely be a difficult sell in some regions of the country.
“It’s not clear to me that a lot of businesses would be willing to give up their ability to deduct interest,” he told Watchdog.org.
And taking capital investments out of the federal tax base might not produce the kinds of effects proponents expect, according to Rosenberg. But the change could hold down debt financing, which tends to distort some companies’ investment strategies, according to some economists,
“It’s a little unclear how big of a change that is relative to the current tax system,” Rosenberg said, adding that the combination could be a wash in terms of overall corporate tax burdens.
Zach Schiller, research director at Policy Matters Ohio, echoed some of those concerns about the overall impact of the federal tax reform ideas.
“I am immediately somewhat skeptical that changes in tax policies are going to have huge impacts,” Schiller told Watchdog.org.
Making it a little cheaper for businesses to invest in capital improvement can have some positive effects, he said, but Schiller favors a different approach than what’s in the Republican plans.
“Investing in workforce and infrastructure and improving public services is oftentimes a more useful and long-term strategy than a tax-cut strategy,” he said.
Moreover, an immediate write-off for capital investments made by businesses would prove expensive, if the proposed limits on business interest deductibility didn’t produce the anticipated windfall in federal revenues, Schiller said.
Ohio already gives businesses tax breaks, and cuts in the federal corporate income tax would be a bad idea because so few corporations now pay the top rate due to deductions, he said.