As Senior Chairman of the Finance Committee in the North Carolina House of Representatives, I am proud to have played a leading role in the tax reform efforts that have turned our state’s economy around in just a few short years. As you can imagine, I am very supportive of efforts to enact long overdue tax reforms at the federal level. Our country’s economic future is at stake.
However, I am opposed to any proposals to limit interest deductibility that may be included in the tax reform package. Maintaining interest deductibility is essential to any successful tax plan and to making our economy stronger and our nation more prosperous.
Eliminating interest deductibility would fundamentally change the tax code in a way that would harm businesses. Interest deductibility is a product of basic accounting. All U.S. business are taxed on the profits they earn. As everyone knows, profits are the money that is left over when cost are subtracted from revenues. Interest payments are a cost of doing business, just as much of a cost as payroll or office rent. Thus, interest payments must be subtracted from a company’s bottom line to arrive at an accurate profit.
Credit is the lifeline for virtually all businesses in the U.S. In fact, borrowing is not limited to large companies. Four out of five small businesses rely on debt financing including 75 percent of startups. Debt financing is critical to businesses as it is what makes it possible for them to grow and hire more employees. At a time when we need to our national economy growing and to get people back to work, limiting interest deductibility would have the opposite effect.
While some believe substituting 100 percent expensing for interest deductibility would balance the books out for businesses, it would not. Many small businesses already enjoy full expensing through Section 179, which was made permanent by Congress in the PATH Act of 2015. For them there would be no trade off at all, only higher borrowing cost. Adding 100 percent expensing while limiting interest deductibility would be a net gain only for the very few businesses that don’t require borrowing to make new investments. Essentially, you can’t expense what you can’t afford. Overall, replacing interest deductibility with 100 percent expensing would only raise the cost of capital for businesses and reduce their investment over time.
Along with tax reform, a key agenda item for President Trump is infrastructure improvements. As a supporter of addressing our infrastructure needs, I know how important our infrastructure is to our long term economic growth. However, limiting interest deductibility will only serve to hinder our ability to meet future infrastructure needs. Plans to increase infrastructure spending through public-private partnerships or an infrastructure bank would greatly increase the cost of capital needs for infrastructure projects if interest deductibility is taken away. The result would be fewer completed projects along with greater financial burden on our citizens in the form of tolls and higher taxes.
One argument supporters of eliminating interest deductibility tout is in today’s low interest rate environment, the impact of eliminating it won’t be that severe and is worth the sacrifice in the entire scheme of tax reform. However, they fail to point out that interest rates will inevitably rise. When that happens, the full impact of higher borrowing cost will greatly constrain business investment. This will lead to slower economic growth, less hiring and greater financial volatility.
As a member of the NC House, I always look to see how federal policies may affect the state. Limiting or eliminating interest deductibility would be a tremendous blow to our state’s economy. Even a 25 percent limitation on the deductibility of interest would cut economic growth in NC by almost $1 billion. As a result, there would be a significant slowdown in job growth and a major decline in take home pay. Major industries many citizens rely on like manufacturing, construction, and transportation would take major hits. If limiting interest deductibility would have that kind of impact on NC, just imagine the nationwide impacts.
I sincerely hope Congress works with President Trump and passes tax reform quickly. I have seen firsthand the positive economic impact tax reforms have made here in North Carolina. After a decade of subpar national economic growth, the time to act is now. However, if Congress wants to ensure tax reform is effective and leads to sustained economic growth, eliminating or limiting interest deductibility must not be a part of the package.
Represenative Jason Saine represents the 97th North Carolina House District with encompasses Lincoln County.