Senators Mitch McConnell (R-KY) and Rand Paul (R-KY) have introduced a bill that would change the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. treatment of interest for bourbon producers. According to the Senators, “This legislation will not only put Kentucky’s Bourbon industry on a level playing field with its competitors, but it is a pro-growth measure that will also help provide a boost to our economy and help create jobs in Kentucky.”
After bourbon producers borrow money in order to finance the production of their product, they need to pay the loan back over a number of years, plus interest. Under current law, that interest is not deductible against taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. until the bourbon that the loan financed is sold. The Senators’ plan would allow bourbon producers to deduct the cost of their interest in the year in which they pay it rather than wait up to two decades to deduct the interest costs.
The current treatment of interest in the tax code for bourbon producers is problematic. The reason is that the longer the deduction of a business cost is delayed, the more that cost is understated. This is due to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. and the time value of money. In other words, a dollar today is more valuable than a dollar next year.
If a Bourbon producer pays $100 in interest this year, but doesn’t get to deduct that interest against its taxable income for a number of years, the value of that deduction declines. Given that bourbon takes many years to make, this happens often For example, a $100 deduction made twenty years from now has a present value of only $14.86 (assuming real discount rate of 10 percent). This deduction greatly understates the business’s true cost.
|
Years |
Present Value of a $100 Deduction |
|
0 |
$100.00 |
|
1 |
$90.91 |
|
2 |
$82.64 |
|
3 |
$75.13 |
|
4 |
$68.30 |
|
5 |
$62.09 |
|
6 |
$56.45 |
|
7 |
$51.32 |
|
8 |
$46.65 |
|
9 |
$42.41 |
|
10 |
$38.55 |
|
11 |
$35.05 |
|
12 |
$31.86 |
|
13 |
$28.97 |
|
14 |
$26.33 |
|
15 |
$23.94 |
|
16 |
$21.76 |
|
17 |
$19.78 |
|
18 |
$17.99 |
|
19 |
$16.35 |
|
20 |
$14.86 |
The ability to deduct interest costs when they occur will fix one issue with the current tax code for bourbon producers. The full cost of their interest will be deductible. Of course, other industries will still not be able to fully deduct their interest, which does create special treatment. Ideally, lawmakers would extend this fix to all businesses. However, it is still important to point out the fact that the fix itself is good tax policy and a step in the right direction.
Share this article