A U.S. tax code that maintains interest deductibility is crucial for economic growth; recognizing its importance to the middle market, ACG highlighted the issue in its 2014 Public Policy Agenda. A 2013 study by Ernst & Young’s Quantitative Economics and Statistics group finds that limiting interest deductibility to finance lower tax rates would reduce economic growth over the long run by over $33 billion in 2013 dollars, with the majority of that effect realized within a decade. Furthermore, all industries and states would see reductions in economic growth as a result of this policy consideration, according to the study. Given that access to credit is essential for middle-market businesses and interest payments are a cost of doing business, full interest deductibility has been a core feature of the modern tax code since its creation in 1921.
ACG supports the Businesses United for Interest and Loan Deductibility Coalition which has worked to ensure that 100 percent interest deductibility is maintained, unless changes are consistent with comprehensive, pro-growth tax reform. While comprehensive tax reform remains unlikely in the 113th Congress and recent drafts of tax law have not included limiting interest deductibility, ACG and the BUILD Coalition continue to monitor policy discussions related to limiting interest deductibility as both chambers discuss tax policy. It is important to note that the new chairman of the Senate Finance Committee, Ron Wyden, D-Ore., in 2007 developed a tax reform draft which imposed strong limits on interest deductibility.
Overall, policymakers in Washington have very little understanding of this issue. Few see credit as a normal part of operations for all businesses. Rather, discussions in Washington incorrectly tend to view credit through the lens of the recent financial crisis and treat limiting interest deductibility as a tool to prevent excessive debt levels in the economy. It is clear that Congress is looking to find revenue to finance tax rate reductions, but deductibility is not a tax expenditure.
As tax reform continues to be discussed in Washington, middle-market business owners must help policymakers understand the importance of maintaining 100 percent interest deductibility. Businesses of all sizes and industries rely on debt financing to make critical investments and manage payroll. Absent a complete overhaul of the tax code that would balance any changes, ACG believes that interest deductibility should remain as it has been for a century.