Ensure Tax Reform Helps Small Businesses, Too
Policymakers in Washington have begun the debate over how to transform the nation’s tax code. But while there is widespread support for some reform to bolster investment and hiring, the question is how to balance the often-competing interests of the nation’s largest corporations with those of small businesses and individual taxpayers.
Tax reform should work as much for the residents and businesses of West Virginia and Ohio as it does for Wall Street and Silicon Valley. To ensure it does, reformers must preserve a fundamental tenet of the nation’s tax code — allowing businesses to deduct from their tax bill the interest on their loans.
The business interest deduction has been in place since the modern income tax was instituted nearly 100 years ago. Our system taxes corporate profits, which means revenues minus expenses, including the cost of borrowing. This is a longstanding principle ingrained in U.S. and international tax and accounting standards.
Unfortunately for small businesses and the local communities they serve, the business interest deduction is on the chopping block. While large corporations that raise funds by selling shares on the stock market would be much less affected by ending the deduction, small businesses and farmers that fund their operations, grow their businesses and create jobs by borrowing would be dramatically harmed.
This would not only impose an arbitrary increase in the taxable income of thousands of businesses nationwide, but it would amount to double taxation of interest, with taxes paid by both borrower and lender. In other words, eliminating the business interest deduction would harm the very small businesses responsible for nearly two-thirds of U.S. employment growth, stunting economic growth.
Tax reform should provide relief for individuals and businesses and eliminate outdated provisions to promote economic growth and jobs. However, certain tax deductions make sense and can only be eliminated at great cost. Like the business interest deduction, removing the mortgage interest deduction would disrupt the economy by abruptly reducing home values, risking another foreclosure crisis. Similarly, preserving the tax-exempt status of interest earned on municipal bonds is critical to ensuring financing for American communities and supporting local public services and infrastructure.
Reformers should focus instead on opportunities to impose greater parity in the tax system. For instance, locally owned and operated community banks like Union Bank, and the many others here in the Ohio Valley, pay federal, state and local taxes, but other financial institutions that operate just like banks don’t pay their share.
Tax-exempt credit unions and Farm Credit System lenders have used their taxpayer-funded competitive advantage to fund their own growth at the expense of tax-paying individuals and small businesses. Some credit unions are exploiting their tax-exempt status by buying up Main Street community banks, resulting in lower tax revenues at the federal, state and local levels. Meanwhile, government-sponsored FCS lenders are seeking to expand beyond their mission into non-farm-lending. We should correct these inequities, allow all companies to compete free from tax collector favoritism, and ensure everyone pays their fair share to balance the government’s books.
Let’s not double the tax on interest and stifle economic investment, but provide a level playing field by reducing tax rates evenly and fairly for all Americans. Policymakers are engaged in a complex and ambitious initiative-updating the tax code for the first time since Ronald Reagan signed the last major reform into law in 1986. Let’s make the most of the opportunity for safe, sound and thoughtful tax reform that doesn’t sacrifice small businesses in the name of corporate profits.
Tim Aiken, President & CEO of Union Bank Inc. based in Middlebourne, W.Va., serves as Vice Chairman of the Safety and Soundness Sub-Committee of the Independent Community Bankers of America (ICBA), and also serves as West Virginia’s elected representative to the ICBA’s Federal Delegate Board.