Senators Doubt Tax Overhaul Would Eliminate Interest Deduction

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By Laura Davison, Colleen Murphy and Kaustuv Basu

Several Senate Finance Committee Republicans expect a final tax overhaul package to retain a tax break that allows companies to deduct interest expense—one of the main revenue raisers in the House GOP tax plan.

“I have a strong feeling they’re not going to get rid of the interest deduction, but you never know,” committee Chairman Orrin G. Hatch (R-Utah) told reporters May 11. “This is going to be a new approach to taxation and I’m open to some innovative new ideas.”

The comments come after Treasury Secretary Steven Mnuchin said in an interview with The Economist that the White House is “contemplating keeping it.”

“That’s our preference. But we’ll look at everything,” he said in the interview alongside President Donald Trump and White House economic adviser Gary Cohn.

Republican senators met with Mnuchin and Cohn on May 9 to discuss tax reform priorities, which included discussions about the administration’s desire to maintain interest deductibility and the lack of enthusiasm for the border adjustment tax, according to lawmakers who attended the meetings.

Eliminating the deduction for net interest expense would hurt debt-reliant business models, commonly used for real estate, private equity and utility companies. However, the White House and some Republican senators have expressed concerns about the other main revenue raiser in the House plan—border tax adjustment—which would levy a 20 percent tax on imports.

‘Debt Is Like Oxygen’

“The concern about interest and BAT from stakeholders is having an effect,” a tax lobbyist said on the condition of anonymity to protect client sensitivities. “There are many compelling stories about the potential negative effects of these provisions.”

The lobbyist also said that Trump is a real estate developer for whom “debt is like oxygen for humans.” It’s hard to imagine the president would back a complete disallowance of interest expense, he said.

The House is considering a small business exception that would allow companies to deduct interest expenses, but the exemption discussed wouldn’t apply to most mid-size or large enterprises.

Mnuchin’s “statements are in-line with the goal of achieving pro-growth tax reform,” Mac O’Brien, spokesman for the BUILD Coalition, said in a statement. “If policymakers want to see strong economic growth and robust job creation, they must support interest deductibility in the tax code.”

Sen. Rob Portman (R-Ohio) said the Senate is examining the issue but “there has been no decision yet.” Sen. Ron Johnson, (R-Wis.), who met with Cohn and Mnuchin on May 9 to discuss tax reform, said “my guess is that you will continue to be able to deduct interest.”

Repatriation Rally

Sen. Charles E. Grassley (R-Iowa), who supports retaining interest deductibility, said the Senate hasn’t decided whether tax reform needs to be revenue neutral. If it does, repatriation would be a pay-for to help fund tax cuts.

Repatriation could help pay for parts of the plan by incentivizing companies to bring offshore profits back to the U.S., but several estimates have found that it would only raise about $200 billion. The Tax Foundation projects that eliminating interest deductions would raise $1.2 trillion over a decade.

If the Senate decides to make the plan revenue neutral—which is a requirement if the plan is going to be permanent and passed through budget reconciliation, requiring a simple majority—lawmakers will face a difficult search for ways to pay for large corporate tax cuts.

“I like the idea of getting rates as low as we can, but there are trade-offs everywhere,” Senate Majority Whip John Cornyn (R-Texas) said.

To contact the reporters on this story: Laura Davison at lDavison@bna.com, Colleen Murphy at cmurphy@bna.com and Kaustuv Basu at kbasu@bna.com, in Washington

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

For More Information

A transcript of the interview with Trump, Mnuchin and Cohn is at http://www.economist.com/Trumptranscript.

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