- Interest deduction seen as important revenue raiser
- Losing deduction would hurt profits of PE and investors
- PE lobby coordinating with other industries to prevent shift
The deductibility of interest payments is becoming increasingly central to Republican tax-reform plans this year.
Companies often assume large amounts of debt when they’re acquired by private equity firms. If those companies can’t deduct interest payments on that debt from their taxes, it could hurt the bottom lines of private equity funds and their investors.
Unfortunately for PE, President Donald Trump’s tax team — including National Economic Council Director Gary Cohn and Treasury Secretary Steven Mnuchin, both formerly of Goldman Sachs — have started to coalesce around the idea of removing the interest deduction as part of their effort to push broad reforms to the tax code.
The White House and congressional Republicans are hankering for a legislative victory after efforts to repeal the Affordable Care Act proved unsuccessful. While the administration and GOP leaders have yet to agree on a final tax-reform package, POLITICO recently reported Trump’s tax team reached “broad consensus” on ways to cut corporate and individual tax rates — and interest deductibility is chief among them.
Interest deductibility has “high potential” to be included in tax reform, one industry lobbyist told Buyouts. A second lobbyist said both House GOP leaders and the White House view it as a “revenue raiser now that the border-adjustment tax is effectively killed.”
A plan floated by House Speaker Paul Ryan and other congressional GOP leaders, which would have imposed a tax on imports, was rejected by the White House earlier this year. In late July, Trump administration officials and key GOP leaders leading the tax-reform effort in Congress issued a joint statement saying border adjustment was no longer considered a viable option for raising tax revenue.
With border adjustment off the table, tax-reform architects have to come up with other ideas to pay for whatever’s lost if corporate tax rates are slashed.
In addition to interest deductibility, the White House is reportedly eyeing removing deductions for mortgage interest as well as for state and local taxes. Trump’s team is also considering a strategy that would allow small businesses to fully expense capital expenditures, effectively deducting the cost of new equipment from their taxes, according to the POLITICO report.
“Our view, as you know, while 100 percent expensing would provide a short-term boost, it would be a long-term detriment to any company that utilizes debt financing,” said James Maloney of the American Investment Council, the PE industry’s primary lobbying organization. “That’s the message we’re continuing to spread.”
Private equity lobbyists are hoping Republicans settle on a plan that avoids the interest deduction.
BUILD Coalition, which counts the AIC among its members, consists of several industry organizations and companies dedicated to keeping the deduction in the tax code. BUILD’s Mac O’Brien said the group has been encouraged by previous statements from prominent Republicans like Sen. Orrin Hatch (R-Utah), who chairs the Senate’s Finance Committee. In May, Hatch told Bloomberg he had “a strong feeling that they’re not going to get rid of interest deduction.”
“Our read is more, they’re starting to reach consensus on these issues. But what that consensus is, is not apparent,” O’Brien said.
While interest deductibility remains on the table, Mnuchin recently hinted that the White House’s stance on carried interest might be more flexible than Trump’s previous statements appeared to indicate.
According to a Bloomberg report of Mnuchin’s Aug. 21 appearance with Senate Majority Leader Mitch McConnell, the treasury secretary said the administration is focused on closing the loophole for hedge funds. Longer-term investors, such as private equity and venture capital fund managers, may be in the clear.
“What we are focused on is there are many other types of funds that do create jobs, and we want to make sure we don’t discourage investment,” Mnuchin said.
Carried interest is currently taxed at a lower capital-gains rate, even though most PE firms put up only a small share of their investments’ equity. Throughout the 2016 campaign Trump repeatedly referred to carried interest’s tax treatment as a loophole.
The AIC has historically lobbied against any proposed changes to that tax treatment, arguing that taxing carried interest at a higher rate would make PE investment less appealing.
“Raising taxes on carried interest would disincentivize entrepreneurial risk-taking that is required to start, save and grow businesses,” according to the AIC’s website.
Trump has tapped several industry luminaries for advice or roles in his administration, including WL Ross & Co Founder Wilbur Ross, Blackstone Group Co-Founder Stephen Schwarzman and Cerberus Capital Management Co-Founder Steve Feinberg.
Trump’s Strategic and Policy Forum, chaired by Schwarzman, dissolved in the aftermath of Trump’s comments about a violent white-supremacist demonstration in Charlottesville, Virginia.
The White House could not be reached for comment.
Action Item: The American Investment Council, visit http://www.investmentcouncil.org/
White House Director of Social Media Dan Scavino (right) is seen in a file photo attending President Trump’s joint news conference with German Chancellor Angela Merkel with National Economic Council Director Gary Cohn (left) at the White House in Washington on March 17, 2017. Photo courtesy Reuters/Jim Bourg