WASHINGTON — When Donald Trump was crafting his campaign tax plan last year, one of his top economic advisers proposed an idea that would have made it harder for real estate moguls to use mountains of debt to make deals.
Trump, who made his fortune as a property developer and earned the nickname “the king of debt,” scoffed at the suggestion.
“He hated that idea,” said Stephen Moore, the Heritage Foundation economist who counseled Trump during the campaign. The proposal to trim interest deductions for companies did not make the cut.
As Trump now focuses his attention on overhauling the US tax code, he has considered turning to the other side of the aisle to reach a bipartisan deal.
But an obstacle has already surfaced, dimming the chances that a “grand bargain” will be achieved: Democrats are sounding the alarm that reshaping the tax code presents Trump’s biggest conflict of interest yet.
A tax code overhaul gives Democrats the chance to again bring up Trump’s refusal to release his tax returns and to press for details of how his business deals are financed. That focus could also affect which tax code items, such as interest deductibility, are included in the overhaul.
“The American people want to see what this is about,” Senator Ron Wyden of Oregon, the ranking Democrat on the Senate Finance Committee, said of Trump’s presiding over tax code changes. “Are our interests being protected or are these deals that somehow promote his interests?”
Representative Hakeem Jeffries, Democrat of New York, said last week that tax code changes should be delayed until members of Congress can review Trump’s tax returns to see how an overhaul of the tax code might benefit him. Representative Terri A. Sewell, Democrat of Alabama, who is on the Ways and Means Committee, declared at a recent hearing that it was “imperative to know how such tax reform affects the president.”
Trump, as president, is legally exempt from the kinds of financial conflicts of interest that other government officials are required to avoid. But that has not stopped questions from swirling about how he and his family could profit from the presidency.
“If the tax reform proposals start to have discussions of whether or not to drop certain deductions for the real estate business, or to expand those, that now becomes the entire matter of tax reform,” said Richard Painter, who was President George W. Bush’s ethics lawyer.
Referring to Trump, Painter added: “He cannot be an honest arbiter.”
The opportunity to use Trump as a weapon against a tax overhaul could distort the debate in other ways. After the fight over the “border adjustment” tax, the most contentious topic is the deductibility of net interest expenses, the idea Moore had unsuccessfully proposed to Trump.
House Republicans, led by Speaker Paul Ryan, want to end the practice of allowing businesses to lower their tax bills by deducting interest from their incomes.
Instead, companies would be able to immediately write off the costs of equipment expenses. This would generate more than $1 trillion in revenue — roughly the same amount as the border adjustment tax — according to an analysis by the Tax Foundation, a nonpartisan tax research group.
“It’s been surprisingly less controversial so far than one would expect considering it’s a $1 trillion tax increase,” said Alan Cole, an economist at the foundation.
But new coalitions are forming to fight back against ending interest deductibility. Some Republicans from rural districts have expressed concern about how scrapping interest deductibility would harm farmers who rely heavily on debt financing. Private equity and real estate lobbyists have also been aggressively mobilizing to resist the potential change.