Eliminating the CIT Deduction: Valuation Implications for Middle Market Enterprises
Article – May 2016
Corporate / Valuation / Corporate consulting
The elimination of the corporate interest tax deduction will have serious and far-reaching implications for equity valuations, and the potential to adversely affect the growth and health of the US middle market and the greater US economy.
Most discussions about changing the CIT deduction are coupled with the notion of being “revenue neutral,” whereby other parts of the tax code would be adjusted so that total taxes paid would be roughly the same as under the current system. However, “revenue neutral” is not the same as “impact neutral” in terms of equity valuation or the impact it would have on economic growth in the middle market.
Populating the corporate value equation with observable market data, RGL Forensics has quantified the impact on the equity valuations of individual companies assuming the loss of the CIT deduction caused by resulting changes in the cost of capital and growth. The research study is based on a sample of 2014/2015 data available for 835 public companies, which was tested and extrapolated across the middle market based on the definition of “Middle Market Enterprises” by the National Center for the Middle Market.