Donald Trump’s emerging tax plan could benefit leveraged real-estate companies like the one he runs with new and substantial subsidies.
The Republican presidential nominee appears poised to combine two policies that House Republicans—and tax analysts from both parties—say shouldn’t be paired: letting businesses deduct interest and allowing expensing, or immediate write-offs, for investments in equipment and buildings. Current law requires businesses to spread those deductions over multiple years.
The result would provide negative tax rates for investments financed with debt, creating incentives for companies to pursue projects that wouldn’t make sense economically without the tax benefits.
“It is insane to do expensing and continue to allow interest deductions. That’s like the closest I can think of to a bipartisan sin among tax nerds,” said Lily Batchelder, a New York University law professor and a former aide to President Barack Obama. “This is converting the tax code basically into a direct spending program for anything that people can get a tax lawyer to say is debt-financed business investment.”
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Mr. Trump hasn’t officially announced the proposal yet as he revamps his tax plan to limit the projected revenue losses from the version he released in 2015. In a speech last week in Detroit, Mr. Trump said he supported full expensing—which is normally combined with sharp limits on interest deductibility—aligning himself with House Republicans and the plans of several of his defeated Republican rivals.
But the candidate also is wary of eliminating interest deductions, according to Stephen Moore, a Trump adviser, although Mr. Moore says the plan is still negotiable. The campaign has said that more details on Mr. Trump’s tax policies will be released in coming weeks.
Larry Kudlow, another adviser, told The Washington Post that ending the interest deduction was “unpopular” inside the campaign. Mr. Trump’s earlier plan proposed an unspecified “reasonable cap” on interest deductions.
“It was something Trump was uneasy with himself,” Mr. Moore said. “He was uneasy about this idea of taking away interest deductibility. He just thought it would be hard for businesses to capitalize without this.”
Expensing has become increasingly popular in Republican policy circles over the past few years as a way to stimulate business spending and spur economic growth. The conservative-leaning Tax Foundation, for example, said expensing would increase long-run gross domestic product by more than 5% and is efficient because it only rewards new capital and reduces the marginal effective tax rate on new investment to zero.
Expensing and an end to interest deductions are usually paired to prevent giving an extra subsidy, said Republican economist Douglas Holtz-Eakin, who said Mr. Trump’s tax plans are less clear after his speech on the subject last week.
“I don’t know where he is. It’s very weird,” Mr. Holtz-Eakin said. “It’s all very murky to me at this point.”
Some analysts, including those at the Tax Foundation, say interest deductions can be appropriately combined with expensing. They note that many recipients of interest, such as banks, would pay taxes on the interest income they receive from the businesses taking deductions.
Democrats, however, are wary of expensing due to the potential revenue loss—and are dubious that speeding up deductions for capital investment would have much benefit in an era when low interest rates mean deductions today and deductions in the future have similar value.
“I guess the pro would be you really would encourage investment in plants and equipment,” said Steve Rosenthal, a senior fellow at the Tax Policy Center who has urged limits on tax provisions used by high-income taxpayers and corporations. “The con is that you would open up huge arbitrage opportunities.”
A business would be able to generate significant losses in the first year of an investment and then generate ongoing interest deductions. Those losses, which can be thought of as a negative tax rate, can be carried forward and could offset future income.
Without sharp limits on interest deductions coupled with expensing, “there’s a certain generosity of treatment here that would seem excessive,” said Alan Viard of the American Enterprise Institute, a right-leaning think tank. The Congressional Budget Office estimated in 2014 that allowing immediate write-offs and interest deductions would yield a minus-61% tax rate on debt-financed corporate investment.
“A huge corporation that is generating a lot of profits is going to have an advantage over a startup in using these benefits,” said Don Susswein, a principal with RSM, a tax, audit and consulting firm.
That kind of policy might also be particularly beneficial to someone such as Mr. Trump, who could generate investment and interest deductions from real-estate investments and then use those losses to offset taxable income from licensing deals, book royalties and speeches.
Mr. Trump hasn’t released his tax returns, so it isn’t clear exactly how he would be affected. He has proclaimed himself the “king of debt” and his financial disclosure forms show that he owes more than $ 315 million.
“It’s clear he’s in commercial real estate and he uses a lot of debt,” Ms. Batchelder said. “And the people that would benefit most from this are people that would use a lot of debt and are in real estate.”