Thanks in part to tax reform, optimism among manufacturers has hit record levels, manufacturing job growth reached its best pace in decades and manufacturing output hit an all-time high in the third quarter of last year. In short, manufacturers are keeping their promise to create jobs, raise wages and boost investment following tax reform.
Yet recently proposed Treasury regulations, if finalized without modification, would make it costlier to invest for growth in the U.S. In comments submitted this week, the National Association of Manufacturers highlighted the harm facing manufacturers and called on Treasury to change its rule.
The proposed rule implements new limits on the ability of businesses to deduct interest on their debts. For tax years beginning in 2018 through 2021, the tax reform bill limited interest deductions to 30 percent of a company’s earnings before interest, tax, depreciation and amortization (EBITDA). Beginning in 2022, an EBIT standard takes effect, further limiting available interest deductions for capital-intensive industries by excluding depreciation and amortization from the base upon which allowable deductions are calculated.
Treasury’s proposed regulations would effectively impose the stricter EBIT today – four years earlier than expected. Doing so would disproportionately harm manufacturing by making it more expensive to finance capital equipment purchases. Moreover, the proposed rule acts as a disincentive to utilizing full expensing (also known as bonus depreciation), a key pro-growth incentive in tax reform which reduces after-tax costs by providing a 100 percent deduction for the purchase of equipment and machinery. Given that for every one dollar spent in manufacturing, nearly two dollars is added to the economy, this proposed regulation would hurt manufacturers and slow our country’s economic growth.
Protecting the interest deduction is important for manufacturers, and that’s why the NAM is engaging with Treasury, and why it successfully fought during tax reform to ensure that manufacturers would not immediately be subject to the stricter limitation.
It’s clear that Congress intended to provide manufacturers a larger EBITDA base for interest deductions for the next several years. Accelerating a stricter limitation that harms manufacturers is inconsistent with Congressional intent and would make it more difficult for manufacturers to continue to fulfill their promise to increase hiring, invest in the U.S. and continue to raise wages.