As the Director of Government Relations of A.P. Moller Maersk Group, I urge the legislature to allow a deduction for interest expense by de-conforming from IRC 163(j) when conforming to the Tax Cuts and Jobs Act (TCJA). Preserving interest expense deductibility would ensure that the Commonwealth prevents a corporate tax increase, stops a hike in the cost of capital and remains competitive for investment.

For over 20 years, A.P. Moller Maersk Group has operated in Virginia. Currently, we employ 150 people in Virginia. Our U.S. Flag division , Maersk Line Limited, is headquartered at Norfolk, VA with additional offices in Reston, VA. On a daily basis, Maersk Line Limited employs nearly 750 Seafarers on 33 U.S. Flag ocean vessels. Maersk Line Limited has invested over $500 million in its fleet; therefore, the cost of capital remains a critical line item. 

The Tax Cuts and Jobs Act (TCJA) was a seismic shift in tax policy that dropped the federal corporate income tax rate and added new base broadeners. Since states conform to this larger tax base but not to the rate cuts, conformity to the TCJA tax law would increase Virginia's corporate tax base by 13% according to analysis by EY. One of these many base broadeners is IRC 163(j), which limits interest expense deductibility. 

The ability to deduct interest as an ordinary and necessary business expense is a longstanding principle of U.S. tax policy that reduces the cost of capital, which helps encourage investment and expansion. For Virginian companies ,like mine, having more capital translates into building new plants and facilities in the United States or acquiring new assets to further grow in this market. However, if Virginia fails to preserve interest deductibility, the Commonwealth would be enacting a hidden tax increase that would raise the cost of capital and increase taxes on Virginian employers. As international competition for capital allocation has never been fiercer, keeping the cost of capital down remains important.

Interest deductibility was only limited by the Tax Cuts and Jobs Act to help pay for a 40% corporate income tax rate reduction and move to 100% immediate expensing - two clear policy objectives to make the United States more competitive. However, Virginia is not cutting its tax rate and currently de-conforms from federal immediate expensing rules under IRC § 168(k). Congress clearly intended for these two rules to work together. Therefore, Virginia should allow a deduction for interest expense by de-conforming from IRC § 163(j) because it already deconforms from IRC § 168(k). On the other hand, failing to preserve interest deductibility impacts companies twice in Virginia: they would be denied immediate expensing and limited in interest expense deductibility. Taken together, this double impact is antithetical with the pro-growth business environment fostered by this legislature. 

To date, Indiana, Wisconsin, Tennessee, South Carolina, Georgia and Connecticut have de-conformed from IRC 163(j), preserving interest expense deductibility while adopting conformity. Many of these states are direct competitors to Virginia. 

For the reasons outlined in these comments, A.P. Moller Maersk Group urges Virginia to preserve interest expense deductibility as historically allowed by Virginia by de-conforming from IRC 163(j). 

Thank you for your consideration.

Sincerely

Doug Ludwig