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The House Republican vision for a revamped tax code could clash with the communications sector’s broadband expansion plans, potentially disrupting a major upgrade to the nation’s digital infrastructure.
Lawmakers are weighing whether to scrap the interest deduction, which companies use to write off interest payments on debt from their tax bills. Highly leveraged industries like telecom and private equity prize debt financing as crucial.
But House Republicans are bent on cutting business taxes. Culling deductions would give them revenue to offset tax cuts. Eliminating the interest deduction would raise $1.5 trillion over a decade, according to the conservative-leaning Tax Foundation.
For telecom companies like AT&T Inc. and Verizon Communications Inc., the change could upend the way they do business as they plan to expand the nation’s high-speed broadband networks.
Many parts of the country still lack high-speed internet access. According to the Federal Communications Commission’s most recent broadband progress report, released in early 2016, 53 percent of Americans and 87 percent of rural Americans have no access to high-speed wireless service.
House Republicans, in a blueprint released in June 2016, want to let companies immediately write off capital expenditures, a trade-off for the interest deduction that they’re pitching as a boon for capital-intensive industries like telecom. Their blueprint hasn’t yet evolved into a bill, but lawmakers have begun hearings to discuss the topic. It’s unclear how the Senate will handle interest deduction.
“It would be a very big deal indeed if telecom operators of all stripes were suddenly unable to deduct interest,” Craig Moffett, a senior research analyst at MoffettNathanson LLC, told Bloomberg BNA. “The problem isn’t so much that their earnings would go down. The problem is that if interest weren’t deductible, they would almost certainly have to adjust their capital structures accordingly, and that would ultimately mean lower return on equity for the recapitalized companies.”
For the broadband industry, it’s an inconvenient time to shake up business. Wireless providers are eyeing a major upgrade to broadband infrastructure nationwide to support the 5G era of ultra-fast mobile broadband. Wireline broadband companies large and small are also planning to make high-speed network upgrades. These upgrades will likely require billions of dollars of investment.
A trade group that includes T-Mobile US Inc. and Sprint Corp. warns that removing the write-off could squelch the progress of building out networks by making debt financing harder. Scrapping interest deduction “would be very harmful to a number of our companies who have high capital investment ratios,” Chip Pickering, CEO of INCOMPAS, which also includes tech behemoths like Facebook Inc., told Bloomberg BNA.
Companies like Nokia that provide technology and tools for broadband expansion could see those plans change without the interest deduction.
“A significant proportion of our customer base relies on the ability to expense and deduct interest,” Brian Hendricks, Nokia’s head of technology policy and public affairs for the Americas region, told Bloomberg BNA.
GOP policymakers and analysts argue the tax code shouldn’t drive businesses’ financing decisions. But for the communications industry, debt is part of doing business.
Eliminating the write-off could prompt public companies to milk more capital from shareholders as they refresh the nation’s infrastructure. Smaller companies, co-ops and private companies that lack access to equity financing could suffer more acutely.
“Limiting or eliminating the interest deduction disproportionately affects private companies,” Stephen Boggs, a spokesman for Cox Communications Inc., told Bloomberg BNA in an email.
The most publicly prominent fight over the House’s tax plan has centered on border adjustment, a provision to tax imports and exempt exports, which has raised the ire of retailers. But interest deductibility could end up equally consequential to the tax overhaul process, and the telecom industry is plugged in to those discussions.
Bloomberg Government data show that CenturyLink Inc., Comcast Corp., and Charter Communications Inc.—or firms lobbying on their behalf—named interest deductibility as a topic of discussion in lobbying forms from the first quarter of 2017. The forms don’t disclose their position on the matter.
Another group advocating to keep the interest deduction is the Businesses United for Interest and Loan Deductibility (BUILD) Coalition, which includes telecom-sector membership.
Pickering’s group is discussing the provision with its member companies.
“We will begin to make the case to [Rep.] Kevin Brady [R.-Texas] and others why the broadband companies that are investing billions of dollars in the critical infrastructure of the future need the interest deduction to continue,” Pickering said. Brady is the chairman of the House Ways and Means Committee.
Smaller carriers are sounding alarms. But for AT&T, losing the write-off isn’t necessarily a deal breaker amid promises of lower tax rates. AT&T Chief Financial Officer John Stephens praised its alternative, the full expensing plan, in a recent Ways and Means hearing.
He urged lawmakers to use transition rules if they remove the deduction, a move Stephens said would be “extremely problematic” on its own but “may be necessary as part of a broader solution.”
Stephens hasn’t appeared concerned that retooling interest deduction would sour infrastructure investment. Lower tax rates would likely boost prospects for that investment, Stephens said at an AT&T policy event in March.
“We don’t look at those individual items like the lack of interest expense deductibility or the border adjustability as separate items,” he said then. “You have to look at it holistically.”
Pickering said that the issue transcends size, even if it wouldn’t bruise the bigger players as badly.
“It would disproportionately affect the smaller, the rural and the competitive carriers, but my sense is larger companies will also want to maintain interest deduction on their capital investments,” he said.
Verizon spokesman Rich Young declined to comment.
Brady told reporters June 15 he’s weighing exceptions for certain sectors, including small businesses and regulated utilities. He said businesses would have certainty under the revamped code.
“My thinking is that we grandfather all existing debt, maintain those current financing arrangements to create certainty and stability going forward,” he said.
Brady is framing the full expensing proposal as a bold change that would drive expansion, including in the telecom industry.
The blueprint will “help telecom companies across America grow and hire new workers,” Brady spokeswoman Emily Schillinger told Bloomberg BNA in an email.
“If you’re a large telecom company such as AT&T or Verizon and you have, say, billions in capital expenditures in a year, something like full expensing is going to be pretty nice for you,” Kyle Pomerleau, director of federal projects at the Tax Foundation, told Bloomberg BNA.
Hendricks, of Nokia, is skeptical of the provision’s merits. It wouldn’t add a benefit, he said, but would simply shift in time a benefit companies would already receive. Any short-term investment it spurs wouldn’t suffice to offset the loss of the interest deduction, he said.
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