Richard Rubin reported yesterday at The Wall Street Journal Online that, “Republicans looking to rewrite the U.S. tax code are taking aim at one of the foundations of modern finance—the deduction that companies get for interest they pay on debt.
“That deduction affects everyone from titans of Wall Street who load up on junk bonds to pay for multibillion-dollar corporate takeovers to wheat farmers in the Midwest looking to make ends meet before harvest. Yet a House Republican proposal to eliminate the deduction has gotten relatively little sustained public attention or lobbying pressure.”
“The GOP proposal to scrap interest deduction would have profound impact on debt-reliant businesses,” such as farming. (“The $1.5 Trillion Business Tax Change Flying Under the Radar,” The Wall Street Journal Online. June 25, 2017).
Mr. Rubin explained that, “Getting rid of the deduction for net interest expense, as House Republicans propose, would alter finance. It also would generate about $1.5 trillion in revenue for the government over a decade, according to the Tax Foundation, allowing for investment breaks and rate cuts elsewhere in the tax code.”
The Journal article pointed out that:
But for some debt-reliant businesses the interest deduction’s demise could be a significant blow. Crop growers who depend on bridge loans to work through seasonal business fluctuations could face higher tax bills for little benefit.
“Andy Hill, who farms corn and soybeans on about 600 acres in north-central Iowa, said he pays less than $10,000 a year in interest on a line of credit between $100,000 and $200,000. That loan helps him bridge gaps between his expenses and his income, between when he needs to buy seed and fertilizer and when he sells his crops.
“‘[Losing the ability to deduct interest] wouldn’t put me in the red by any stretch of the imagination, but it makes it very debilitating as far as household income,’ said Mr. Hill, who added that he has spoken to both of his senators and his House member about the issue.”
Yesterday’s article pointed out that, “Because so much is at stake for so many sectors, writing the law could get messy. [Rep. Kevin Brady (R., Texas), the author of the plan] said small businesses and utilities could get exceptions or specialized rules, as would debt-financed purchases of land, which wouldn’t be eligible for immediate investment write-offs.
“The administration, including a president who proclaimed himself the ‘king of debt,’ has been wary of repealing the interest deduction but hasn’t drawn a hard line. Treasury secretary Steven Mnuchin has said his preference is to keep it. Resistance could build among Republicans in Congress and among real-estate firms and the agriculture industry, which have formed a coalition to fight the proposal. Yet financial markets so far have registered little reaction to the prospect of the interest deduction going away. One reason: The tax change most likely would apply to new loans only.”
With respect to agricultural resistance to the tax idea, Naomi Jagoda reported earlier this month at at The Hill Online that, “More than 30 agriculture groups are expressing concerns about House Republicans’ proposal to eliminate the deduction for interest expenses as part of corporate tax reform.
“‘As Congress works to enact comprehensive tax legislation, the positive reforms made should not be undermined by negative, unintended consequences as a result of eliminating the business interest deduction for agricultural entities,’ the groups wrote in a letter earlier this month to House Ways and Means Committee Chairman Kevin Brady (R-Texas) and ranking member Richard Neal (D-Mass.).
“The tax reform blueprint that House Republicans released last year proposed eliminating the interest deduction because it would instead allow businesses to immediately write off the full costs of their capital investments. The elimination of the interest deduction has been estimated to raise more than $1 trillion in revenue that can be used to offset cutting tax rates.”
The Hill article added that, “The agriculture groups said in their letter that most family-owned farms rely heavily on credit, and that agricultural producers use debt financing to purchase land and equipment.
‘Eliminating the interest deduction will place further financial stress on an already debt-burdened industry, and prevent producers from staying profitable in challenging economic times,’ they said.
“The groups also said that debt financing will be particularly important for those seeking to get into the agriculture industry.”
On the issue of agricultural related debt, recall that a farmdoc daily update earlier this year explained that, “Nominally, agricultural debt reached a peak in 1984 of $188.8 billion. From 1984 through 1989, agricultural producers retired debt and agricultural lenders wrote off some debt, resulting in a decline in total debt.”
The farmdoc update added that, “Since 1990, agricultural debt increased an average of 4.1% per year. The rate of increase varied from year-to-year but exhibited no escalating or decreasing trends. The highest rate increases occurred between 2006-2007 and 2007-2008 when increases were 11.6 and 8.4%, respectively. Increases of less than 3% occurred 6 times in this period while decreases happened in 3 years with the greatest at negative 3.2% in 2002-2003.
“At the end of 2004, agricultural debt reached $197.6 billion, surpassing the previous high set in 1984.”
“Since 1993, agricultural debt in real terms increased all but three years 2000, 2003 and 2012. Since 1990, the rate of increase averaged 2.1% for real debt levels, much lower than the 4.1% nominal rate increase. The forecasted numbers for 2016 and 2017 are the highest levels in real terms since 1985,” the farmdoc update said.
Source: Keith Good, Farm Policy News
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