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One tax break could save companies $2 trillion, but they don't want it

  • Full expensing proposal would allow businesses to write off the entire cost of their capital investments immediately, rather than draw it out over several years.
  • The idea is a key pillar of the blueprint for tax reform from House Republicans.
  • However, the proposal could cost $2.2 trillion over the next decade and that has many conservative groups coming out against it.
  • Many companies, members of the so-called RATE Coalition, are actually against it as well, instead pushing to make lowering the corporate rate the primary objective of tax reform.

Republican lawmakers are dangling the prospect of a massive new tax break for businesses as part of their sweeping rewrite of the nation's tax code. But many of America's biggest companies aren't biting.

The proposal, known as full expensing, would allow businesses to write off the entire cost of their capital investments immediately, rather than draw it out over several years. The idea is a key pillar of the blueprint for tax reform from House Republicans, ending what they say are incentives in the current system for companies to rack up debt instead of investing back in the business.

But the proposal also comes with an eye-popping price tag: $2.2 trillion over the next decade. Conservatives are split over whether the measure is worth it, and businesses are worried that the measure will come at the expense of reduced headline rates.

"The lower our corporate tax rate, the more competitive our country will be for jobs and investment. That's why we oppose any provision that stands in the way of lower rates, including full and immediate expensing," said Bill Riggs, spokesman for Freedom Partners, which is backed by the billionaire Koch brothers. "Putting that $2 trillion for expensing towards lower rates would have a greater positive impact on our economy and send a message to the rest of the world that America intends to compete and win."

Freedom Partners was among the most vocal opponents of House Speaker Paul Ryan's other signature proposal, the border adjustment tax. After House Republicans agreed to abandon that effort in July, the group began zeroing in on full expensing as the next roadblock to tax reform.

Joining the fight are a laundry list of corporate America's household names, including AT&T, Boeing, FedEx, Ford and Walmart. They are members of the so-called RATE Coalition that are pushing to make bringing down the corporate rate the primary objective of tax reform.

"We think that is the key variable in tax policy and should have primacy as policymakers consider what to do to make America more job friendly and competitive," said Jim Pinkerton, the group's co-chairman.

Complicating the issue is its connection to another politically popular tax break: the ability of companies to deduct the cost of borrowing money. The House plan gets rid of that benefit and replaces it with full expensing. But interest deductibility is critical to the finance and real estate industries, and they have already begun an extensive lobbying campaign to preserve it.

"Businesses of all sizes borrow in order to finance expansions or meet obligations and the ability to deduct interest expense gives business owners the certainty to make critical operating decisions," the BUILD Coalition — Businesses United for Interest and Loan Deductibility — wrote in a letter to the Senate Finance Committee over the summer. "For many firms, access to credit is essential for working capital, and many of these companies use debt to weather shifts in demand."

The proposal also faces uncertain support in the Senate. Finance Committee Chairman Sen. Orrin Hatch of Utah told CNBC that allowing full expensing is a good idea in principle but complicated in practice.

"I'd like to see that because I think it would be better if they did," he told CNBC in an interview. "But there are a lot of accounting aspects here that have to be taken into consideration. … It's not just a simple little yes or no, but I would like to have a better expensing approach than we have right now."

Hatch is part of the so-called Big Six, members of Republican leadership and White House officials who are hashing out the framework of a tax plan. The group issued a statement in July that promised only "unprecedented" expensing, and House Freedom Caucus Chairman Mark Meadows told reporters last week that congressional lawmakers were walking back from full expensing.

Still, the idea has won support from Republican Sen. Ted Cruz, who last week singled out full expensing as one of his top goals in tax reform, as well as the influential advocacy Americans for Tax Reform. Steel companies and the oil and gas industry have joined forces to fight for faster expensing as part of the CRANE Coalition, though the group said it is carefully watching the potential tradeoffs.

The measure is also backed by the Small Businesses & Entrepreneurship Council, which argues it should be part of a package that also lowers individual and corporate tax rates.

"When we're talking about something that is substantive and comprehensive, all of these things should be in the debate," said Ray Keating, the group's chief economist.

Currently, small businesses are able to fully deduct up to $500,000 of capital investments, with the benefit phasing out at higher rates. Large companies can deduct up to 50 percent of certain capital investments under a special provision known as "bonus depreciation," which is set to phase out by the end of 2019.

Republican Sen. John Thune has proposed legislation that could serve as a potential compromise by making bonus depreciation a permanent feature of the tax code. The right-leaning Tax Foundation, which strongly backs full expensing, said that most of the cost of the proposal comes upfront, as businesses shift to the new system. After a decade, the price tag drops dramatically.

But Pinkerton of the RATE Coalition warned against tinkering around the edges of tax reform.

"We've had any number of nips and tucks in the tax code ... and yet the corporate rate has not changed," he said. "The rate should not be lost track of."