Some of largest and most profitable companies in the US are primed to save billions of dollars from a congressional tax deal that critics say gives “billions in tax credits to the biggest corporations while giving pennies to middle-class children and families”. And private equity funds could be among the deal’s biggest beneficiaries, a Guardian analysis suggests.
The tax cuts passed the House of Representatives at the end of January as part of an agreement that pairs handouts for businesses with a moderate expansion of the child tax credit. The Senate could vote on the bill over the coming weeks, and the White House has indicated that Joe Biden would sign it into law.
The deal, led by Democratic senator Ron Wyden and Republican congressman Jason Smith – the chairs of Congress’s tax-writing committees – would roll back a series of tax measures that were designed to partially offset the cost of the 2017 Trump tax cuts.
Weakening these provisions would allow companies to claim bigger tax deductions for certain expenses, including buying new equipment, spending money on research and development, and paying interest on their debt, as the Guardian previously reported.
Last year the American Investment Council (AIC), private equity’s main trade group, spent more than $3m lobbying the federal government, according to OpenSecrets – more than any single year since 2009. Including their subsidiaries, five of the country’s largest private equity funds – Blackstone Group, KKR & Company, Carlyle Group, Cerberus Capital Management and Apollo Global Management – together spent an additional $21m lobbying over the same period.
“Increasing the interest deductions, which private equity firms have been the worst abusers of, is just another example of how the Wyden-Smith tax deal hands out billions in tax credits to the biggest corporations while giving pennies to middle-class children and families,” the Democratic congresswoman Rosa DeLauro, one of two dozen House Democrats who voted against the bill, told the Guardian.
“While private equity is cheering on the huge tax breaks they will get if this deal passes the Senate, American families are living paycheck to paycheck and struggling with rising costs.”
‘Debt can supercharge the returns of private equity’
Tax policy experts told the Guardian that raising the cap on interest deductibility could provide an especially generous subsidy for private equity funds, which rely heavily on debt.
“The model of the private equity industry is often to … buy public corporations, take them private and load them up with debt,” said Steve Wamhoff of the non-profit Institute on Taxation and Economic Policy. These heavy debt burdens help explain why companies bought by private equity funds are about 10 times more likely than other firms to go bankrupt.
“The deductions that are allowed for interest expenses really make that a more viable business model,” Wamhoff said.
Debt is cheaper when companies get a tax break for deducting the interest they pay on that debt, and “cheaper money, which has to be repaid by their takeover targets, is what makes private equity go,” said Carter Dougherty of Americans for Financial Reform (AFR), an advocacy coalition.
“The magic of the private equity business model, and the way that it’s able to generate outsized returns, is its reliance on debt for the acquisition,” said Brendan Ballou, author of Plunder: Private Equity’s Plan to Pillage America.
If you invest $20m in a business and get 10% returns, you only get $2m back,” Ballou explained. “But if, of that $20m, you actually only put up $2m yourself, you actually make 100% return. So debt, or leverage, allows you to get bigger returns than you normally would if you actually had to put up your own cash.”
That’s how “debt can supercharge the returns of private equity”, Ballou said.
Asked for comment, the AIC referred the Guardian to two letters previously signed by the group, one of which states that “debt financing plays an important role in supporting job-creating investments”.
“There’s already a strong bias in the tax code for debt, and this bill doubles down on that bias to boost private equity’s predatory practices, which will only drive more American companies into bankruptcy and decrease market competition,” said the Texas congressman Lloyd Doggett, one of three Democrats who voted against the bill in the House ways and means committee, in a statement.
“There’s nothing fair about private equity companies lining their pockets while shifting the tax burden to American families already dealing with high costs.”
‘A complete wasteful giveaway’
The Trump tax law established new limitations on how much interest companies could deduct from their tax bills in a single year. That annual cap on interest deductions was tightened further in 2022.
Higher interest rates have made debt more expensive, so private equity funds have found themselves having to invest more of their own money, rather than relying as extensively on borrowed money.
That shift, in turn, has lowered potential returns, adding to the industry’s sense of urgency to loosen the cap on interest deductions, AFR’s Carter Dougherty said.
Not only would the Wyden-Smith deal undo the tighter limit created by the Trump law, but it would do so retroactively, meaning corporations could amend their 2022 and 2023 tax returns to take advantage of the newly generous subsidies.
Making these tax cuts retroactive “would be just a complete wasteful giveaway”, Chye-Ching Huang, the executive director of the Tax Law Center at the New York University School of Law, told the Senate finance committee last November. “You can’t change past investments or wages by giving away tax cuts.”
Loosening the interest deduction threshold would cost $64bn over the next 10 years if it were made permanent, according to an estimate provided to members of the House ways and means committee by the US Congress’s non-partisan joint committee on taxation.
While the Wyden-Smith deal only rolls back the provision through 2025, tax policy experts told the Guardian that corporations and their trade groups would probably work to extend it further.
In a statement to the Guardian, a Wyden spokesperson said: “The provision dealing with business interest was a Republican priority in negotiations, and it’s clear that it would become law in a Republican Congress without any matching benefit for working families. With the support of finance committee Democrats, Senator Wyden set a standard for this divided Congress that any tax cuts for corporations must be matched with an investment in children and families that the Joint Committee on Taxation scores as equal, and that’s why the bill includes a child tax credit expansion that helps 16 million children from low-income families get ahead.”
Smith’s office did not respond to a request for comment.
