For over 50 years, Bloomberg Tax’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...
The idea of full, immediate expensing for business equipment—which advocates say would benefit capital-intensive industries like steel and energy—is in vogue these days, but that wasn’t always the case.
Just a few years ago, a couple of key lawmakers proposed lengthening asset depreciation schedules to help pay for lower tax rates. Now, full expensing underpins a key growth component of the latest House Republican plan to reshape U.S. tax law. President-elect Donald Trump has endorsed it, too.
Not everyone is convinced, but their voices have been quieted thanks to the efforts of backers and Republicans in Congress to paint the provision as an economic boon for manufacturers and businesses in other capital-intensive sectors such as oil and gas, telecommunications and aircraft leasing.
That means permanent, full expensing—which would let businesses immediately deduct expenses from their income—appears here to stay.
Instant write-offs, instead of deductions spread over a period of time, would boost capital formation, lower capital costs and spur new investment in plants and equipment, multiple advocates told Bloomberg BNA.
“I think the real focus is on economic growth and how we jump-start the economy,” said Kevin Dempsey, spokesman for a pro-expensing group called the CRANE Coalition, shorthand for Cost Recovery Advances the Nation’s Economy.
Currently, most business investment write-offs are scheduled over varying time periods.
The decades-old system has proven complicated and economically inefficient, according to critics. Depreciation schedules effectively tax marginal investment, said Kyle Pomerleau, director of federal projects at the conservative-leaning Tax Foundation, calling the approach a tax on an investment with a zero-dollar profit in present value terms.
Despite the economic arguments, congressional taxwriters on both sides of the aisle proposed lengthening depreciation to help pay for lower tax rates as recently as 2014, led by the former heads of the House Ways and Means Committee and Senate Finance Committee, Rep. Dave Camp (R-Mich.) and Sen. Max Baucus (D-Mont.).
Camp, who wanted to make his tax overhaul proposal revenue neutral, chose to lengthen cost recovery—in part because he didn’t have the benefit of a required dynamic score from the Joint Committee on Taxation that would have shown increased revenue from economic growth, he said. In 2015, after Camp retired, the House passed a rule he had long pushed to require the JCT to dynamically score major tax bills to demonstrate their economic impact.
But the JCT did a macroeconomic analysis of Camp’s tax revamp proposal, H.R. 1 in the 113th Congress, at his request, and that helped showcase economic merits of expensing that don’t show up with traditional scoring. Taxwriters today have the benefit of that dynamic estimate, according to Camp, now a senior policy adviser at PricewaterhouseCoopers LLP.
“Now they have the ability to use a pro-growth model to get a more real-world example of how policies will impact Americans, and with growth you get more jobs, higher income, more prosperity for families,” he said. “The rules of putting together a tax bill have changed.”
“I think we have seen a big evolution,” said Dempsey, who in addition to his role for the CRANE Coalition also works as the American Iron and Steel Institute’s senior vice president for public policy.
Steel manufacturers and businesses in other sectors would have suffered under plans from Baucus and Camp to stretch expensing schedules, as would have the broader economy, according to the JCT’s dynamic score of Camp’s 2014 rewrite of the tax code.
Camp said he would have chosen differently on expensing under current circumstances, noting that he received a lot of negative feedback from the business community about stretching out cost recovery. Camp opted against expensing to make the math work for lower rates, according to one of his former aides, who spoke on condition of anonymity in order to freely discuss their internal deliberations.
Slowing depreciation would increase the cost of capital by 8 percent across all industries, according to studies from the CRANE Coalition.
“It wasn’t a popular move,” Camp said.
Lengthening asset lives raises taxes only on new investment, and that would prove more economically negative than raising corporate tax rates, Pomerleau said.
“Overall, the proposal is expected to increase the cost of capital for domestic firms, thus reducing the incentive for investment in domestic capital stock,” the JCT analysis of Camp’s plan said.
Lawmakers hadn’t thought through the policy consequences of limiting depreciation, Dempsey said, noting that short-term revenue gains would eventually get blunted by increasing long-term budget deficits.
But not everyone has signed on—at least not yet.
Ways and Means ranking member Richard E. Neal (D-Mass.), who has partnered with Republicans in the past on quicker expensing schedules as part of economic stimulus, said he was skeptical for now. A fuller picture of the total House GOP tax package would help clarify whether immediate expensing would help as much as backers claim, he said.
“The idea of expedited expensing was always in an economic downturn,” Neal said. “I’d like to have a better idea of what this proposal looks like. I haven’t really seen much of it.”
Given current stronger economic conditions, full expensing might not offer the right elixir to gin up demand, since both capital costs and investment have trended downward in tandem, said Michael Madowitz, economist at the liberal-leaning Center for American Progress.
He said the cost of capital isn’t overly burdensome at present because capital supply has generally risen for decades, even when accounting for the recession in 2008 and 2009 and slow recovery from it. The real interest rate has moved down since the 1960s, Madowitz said.
“The really long trend that’s true in the U.S. and true in most other major industrialized countries reflects what the price of capital is, and it’s basically telling us that when that market clears there’s a lot more money to supply capital than there is desire to invest in it,” he said.
That environment supports past proposals to lengthen cost recovery, according to Madowitz. In other words, current conditions, in which supply exceeds demand, don’t necessarily make the case for shortening cost recovery.
But GOP lawmakers pushing tax overhaul efforts have received the full-expensing message loud and clear.
Combined with reducing the corporate tax rate to 20 percent under the House Republican plan, full expensing leads to a significantly lower cost of capital to drive economic growth and increase jobs, according to the Tax Foundation’s Taxes and Growth Model.
The foundation’s estimates indicate the plan would result in 9.1 percent higher gross domestic product over the long term, 7.7 percent higher wages and 1.7 million more full-time equivalent jobs, even though full expensing of capital investment would reduce revenue by $2.2 trillion over the next decade.
But the full-expensing component is better than a corporate tax cut of the same cost because a corporate tax cut reduces taxes on old and new capital whereas full expensing only benefits new investment, and that drives more economic growth, Pomerleau said.
In addition, full expensing creates more balance with research costs that are already eligible for full expensing.
Accelerated depreciation provisions have been used in the past for fiscal stimulus during economic downturns, but making full expensing permanent shouldn’t remove an option for policy makers the next time they want to try to jolt a slumping economy. They could turn to general investment tax credits that have been used on a temporary basis in the past, for example, according to the full expensing advocates.
Meanwhile, lawmakers now seem to know they shouldn’t raise taxes on new investment because that isn’t an economically effective way to raise revenue, Pomerleau said.
To contact the reporter on this story: Aaron E. Lorenzo in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Meg Shreve at email@example.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)