In Tax Reform, Maintain Interest Deductibility for Economic Growth

Congress is currently developing tax reform legislation, which it hopes to pass before the end of this year.

Tax reform is needed to lower rates, improve competitiveness, grow the economy, improve job creation, and lift wages.

But Congress should be thoughtful about this, to avoid taking two steps forward, just to take three steps back.

The Trump Administration and Congress should work to advance policies that grow our economy and create new jobs, all while fostering innovation, not make it harder for America to do business.

One idea that has been proposed is eliminating interest deductibility for businesses. Doing so would unquestionably make it difficult for businesses to expand and create jobs.

This raises an important question: Why would Congress want to try to hurt middle class Americans who sent them to Washington?

In the State of Texas alone, according to statistics from the Bureau of Labor Statistics, the Bureau of Economic Affairs, the Federal Reserve and Ernst & Young, even a 25 percent limitation on the deductibility of interest expense would reduce Texas’ gross domestic product by $2.88 billion and reduce compensation for Texas’ workers by $370 million.

Debt financing is a common tool utilized by a variety of economic sectors, include manufacturing, construction and transportation and warehousing. In fact, the Texas employees in these industries alone total over two million.

Nationally, we know that as much as 75 percent of start-ups and 80 percent of small businesses use the interest deduction.

Interest deductibility allows companies to borrow money to finance operations, purchase essential equipment and expand without having to sell part of the company.  Interest deductibility gives companies of all sizes options during good economic times, and more importantly during economic downturns.  Business owners can expand without losing equity in their own companies—driving economic growth, stimulating innovation, and strengthening the larger economy.  Why would Congress even consider making it more difficult to access capital for growth and expansion?

Fully 51 million Americans work for small businesses. Small businesses know that the ability to deduct interest expenses enables expansion and hiring more employees. Looking forward, small businesses will grow the national workforce by over six million workers over the next decade, which will lead to a stronger and larger middle class, and a more vibrant American economy with rising wages.

Business owners understand that interest deductibility lowers the cost of doing business and increases access to capital. If lawmakers choose to end this critical tax tool for companies, it would place an even heavier tax burden on employers – the very people we need to move the economy forward in a way that shares the benefits among all Americans.

Eliminating (or significantly reducing) the interest deduction amounts to a new tax on businesses, and that is not the pro-growth tax reform Congress and the Administration have promised.

If Congress really wants tax reform that is both pro-growth and pro-business, then they must leave interest deductibility as it currently is and look at other tax reform measures to encourage growth, not stifle it.

Matt Mackowiak is the president of Austin-based Potomac Strategy Group, a Republican consultant, a Bush administration and Bush-Cheney re-election campaign veteran, and former press secretary to two U.S. senators. He is a weekly columnist for The Washington Times, and the host of a new national politics podcast, “Mack on Politics.” His podcast may be found on iTunes, Google Play, Stitcher, and at http://www.MackOnPolitics.com.