The Tax Break Dividing the Republican Party

A big proposed deduction is pitting some larger corporations against the GOP’s small-business base.

The House GOP's top tax-writers walking with Vice President Mike Pence
The House GOP's top tax-writers, Representatives Kevin Brady (left) and Peter Roskam (right), walk with Vice President Mike Pence. (Manuel Balce Ceneta / AP)

There are few more-prized constituencies in American politics than small businesses, those emblems and underdogs of Main Street U.S.A. that are, as any seasoned officeholder will describe, “the backbone” of the nation’s economy.

And for Republicans trying to sell the public on the job-creating potential of a once-in-a-generation tax overhaul, there may be no handier example than Neutral Posture, the furniture company Rebecca Boenigk runs with her mother, Jaye Congleton, in Bryan, Texas. They launched the business in their garage on January 1, 1989, manufacturing and selling ergonomic chairs designed by Boenigk’s father, an engineer at Texas A&M. Twenty-eight years later, Neutral Posture is not so small anymore: What began as exclusively a chair company now produces entire office suites, right down to the cubicles. Boenigk, the 53-year-old CEO, employs 82 people in Texas, along with some 60 contractors in other U.S. states, Canada, and Puerto Rico.

Two years ago, Boenigk bought a new product line from Knoll, a prominent furniture-design firm, moving 43 truckloads of equipment 1,200 miles from Grand Rapids, Michigan, to company headquarters in Bryan. The multimillion-dollar acquisition resulted in 10 new salaried employees. And Boenigk is ready to expand again: Neutral Posture needs a new building for its centerpiece chair division. “Things are really starting to pick up and grow for us,” she told me by phone this week. “Right now we’re really working time-and-a-half, because we’ve got so many orders that we can’t get them all out in an eight-hour day. She added, “We need more space, and we need more people.”

Exactly how big Boenigk will build, and how many more people she’ll hire, however, depends to a significant degree on whether Congress expands a tax break that has emerged as a central point of contention among Republicans in their deliberations on tax reform. The debate pits the GOP’s more established big-business donor class against start-ups and manufacturers increasingly championed by the party’s lawmakers in Congress. Known as “full expensing,” the provision in question would allow companies to immediately deduct the cost of capital investments from their tax bill, including the purchase of new equipment and facilities like the one Boenigk wants to build. While many GOP economists tout full expensing’s potential for spurring economic growth, critics of the policy, including influential conservatives, say it’s just one more tax break in a system already rife with incentives and that its true benefits are questionable.

Currently, the rules for expensing vary by industry and are hard to parse, requiring companies to consult accountants and write off purchases over several years. “We can just make the best business decision we can make and hope we don’t get penalized too much for it,” said Boenigk, a Republican who testified in favor of the party’s tax-reform effort before the House Ways and Means Committee in July. “But if we knew that we had full expensing, the building would probably be bigger.”

That’s the argument Republican tax-writers in the House are relying on as they push to make expensing a cornerstone of the plan they hope to release next month. Backed by manufacturers and several influential advocacy groups, they point to findings from the nonpartisan Tax Foundation that policies incentivizing capital investment act as an economic stimulus, leading to the creation of higher-paying jobs. “Full expensing is, in my view, the most important part of tax reform,” said Scott Greenberg, a senior analyst at the think tank.

Greenberg and another Tax Foundation analyst, Kyle Pomerleau, have argued that full expensing would generate even more economic growth than another main goal of the Trump administration and congressional Republicans—slashing the corporate tax rate from its current 35 percent to as low as 15 percent. The reason is that while businesses could take advantage of a lower base rate without spending any additional money, full expensing would encourage new economic activity. “Every new dollar the government loses is going to new investments,” Greenberg said.

Yet the drive for full expensing faces mounting opposition from conservatives inside and outside Congress who, along with allies in the White House, are prioritizing a steep drop in the corporate rate and worry that the narrowing path for tax reform cannot accommodate both provisions. As they did on health care, Republicans must work around strict budget rules to pass a tax bill on their own, without relying on Democratic votes in the Senate. Given this strategy, their plan cannot add to the deficit after a decade unless the GOP decides to simply enact temporary tax cuts that expire within that window—a move that House Republicans are, for the moment, staunchly against.

Those constraints mean that Republicans must find a way to offset the most costly elements of their plan, either by raising taxes elsewhere or closing popular loopholes and deductions. One by one, however, party leaders have eliminated some such revenue-generating options because of political opposition. President Trump does not want to touch the home-mortgage or charitable deductions, and Speaker Paul Ryan was forced to abandon his push to enact a border-adjustment tax that could have raised as much as $1 trillion to offset rate cuts. Full expensing is, well, expensive, from the government’s perspective. While GOP tax writers expect that the policy would help generate revenue in the long term through expanded economic growth, allowing businesses big and small to immediately write off major expenses would be a significant hit to the federal budget in the short run (although the Tax Foundation argues it would not be as costly as some in the GOP think). And that means a tradeoff must be made somewhere else in the tax code.

Tax reform involves hundreds of these debates—which tax breaks should stay, which should be expanded, and which should be ditched? But because full expensing is such a large and costly proposal, and because it has been a priority for House GOP leaders like Ryan and Representative Kevin Brady of Texas, the Ways and Means Committee chairman, it has become an obstacle as the party struggles to complete its plan. With support from the Koch brothers, the GOP mega-donors, conservatives in the House Freedom Caucus are urging their leadership to give in on expensing and prioritize a corporate tax rate below 20 percent, if not quite the 15 percent proposed by the Trump administration earlier this year. Many in the GOP believe that if the party pursues full expensing, it would have to accept a higher base rate in order to avoid increasing the deficit and running afoul of the Senate’s budget rules.

The divide has elements of the tension between the GOP’s traditional backers on Wall Street and the smaller, more blue-collar businesses whose employees are more likely to represent Trump’s working-class base. Larger, more established firms that are not rapidly expanding and not capital-intensive are less interested in full expensing than a straight cut in the corporate rate. And they have allies in the White House, where the president’s point men on tax reform, Treasury Secretary Steven Mnuchin and Gary Cohn, the chief economic adviser, are Wall Street veterans and have emphasized driving the corporate rate as low as possible. The administration’s initial one-page sheet of principles for tax reform made no mention of expensing, and a joint statement issued last month by congressional and White House negotiators said they would prioritize “unprecedented capital expensing”—a formulation that stopped well short of full and immediate.

“The House very much reflects the mindset of entrepreneurial firms, a desire to have a code that supports the growth of these sort of young, upstart firms,” said Doug Holtz Eakin, a Republican economic adviser, of the supporters of full expensing. “They’re going to be growing rapidly; they're going to be doing capital investing. They want to give them a tax code that supports that. They believe in more rapid economic growth as a first priority.”

On the other hand, Holtz Eakin explained, “older, more established companies are typically the ones that voice some hesitation on whether they'd change their plans much because of expensing.” Those firms also prioritize the ability to deduct interest payments from their tax bill, another loophole that would be jeopardized by full expensing.

The internal GOP debate over expensing has centered on priorities and principles more than the actual effectiveness of the policy. It’s a question at the heart of any proposed tax incentive: Would the ability to deduct the cost of capital expenses prompt businesses to make investments they wouldn’t otherwise make, thereby generating new and stimulative economic activity? Or would it merely reward businesses for decisions they would have made anyway? After all, even Boenigk said she would likely build a new facility regardless of the policy; a bigger tax break would just prompt her to spend more, so the difference would be marginal.

“You can never really know if they’re changing people’s behavior,” said Matt Gardner, a senior fellow at the left-leaning Institute on Taxation and Economic Policy. Gardner pointed me to a quote from Paul O’Neill, President George W. Bush’s first Treasury secretary, who told a Senate committee at his 2001 confirmation hearing: “If you want to give me inducements for something I am going to do anyway, I will take it. But good businesspeople do not do things for inducements.”

The argument that conservatives are making against full expensing is not that it’s ineffective but that it stands in the way of a simpler, flatter tax code in which the government does not play favorites and “pick winners and losers.” “Full expensing is the government choosing to value one form of economic activity,” said Tim Phillips, the president of Americans for Prosperity, the Koch-funded conservative advocacy group that is putting its full weight—and money—behind the tax-reform push this fall. “And, it's a good form of economic activity, absolutely. However, we believe it's better to lower and flatten rates for everyone.”

Conservatives are also making a political case that the more straightforward the GOP tax plan is, the easier it’ll be to sell to a skeptical public. Cutting taxes is a simple message and one that President Trump has already embraced. Explaining which tax breaks are better than others is less so. “It’s also crucial to being able to sell tax reform to the American people,” Phillips told me. “If it were to evolve into a battle among well-heeled corporate interests for tax breaks, then they’re going to be disappointed and turned off by that.”

Rebecca Boenigk, not surprisingly, sees the divide differently. To her, it’s one in which small and midsize firms like hers are battling “the 1 percent” who exploit the tax incentives smaller businesses rely on and make them political targets. “Make a law that 99 percent of us can live with, and put a limit on it,” she told me. “If that’s your big concern, say you can do full expensing up to $10 million. That’s going to help small businesses and farms and things like that, and it’s not going to help the people they’re so worried about.”

In the end, that might be the type of compromise the GOP settles on. Tax reform is inherently a series of hundreds of trade-offs, and after a long, frustrating defeat on health care, what Republican lawmakers want most is a plan they can explain and sell—to voters, to cash-flush donors, and yes, to their beloved hometown small businesses. “Most folks that I talk to in my district, they’re interested in what's the bottom line for them much more than what are the subtleties inside it,” Representative Peter Roskam of Illinois, who heads the House’s tax-writing subcommittee, told me. “And if they come away and they say, ‘Look, this system is simpler and my taxes are going down,’ then that’s attractive to them.” If only it were that easy.