Full Expensing: The Next Tax Reform Battle?

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...

By Laura Davison

Full and immediate expensing of business investments is one of the most dramatic policy shifts in the House Republican plan to overhaul the tax system.

House Ways and Means Committee Chairman Kevin Brady (R-Texas) says it’s the best way to expand the economy. Opponents say it’s too costly and may not live up to those growth projections.

Tax policy thinkers have debated about two other big elements of the tax plan, the controversial border adjustment tax and elimination of the deduction for net interest expense, and Brady has shown willingness to compromise on those issues. The discussion has now turned to both the cost and the policy underpinnings of allowing companies full expensing.

Full expensing encourages growth because “only if you purchase something do you get the tax benefit,” Gavin Ekins, a research economist at the Tax Foundation, told Bloomberg BNA in an interview. “If there is a rate cut, I get the benefit whether I buy something or not.”

But opponents say it’s prohibitively expensive to let businesses deduct the cost of equipment, inventory, software, and buildings. Earlier this month, Rep. Mark Meadows (R-N.C.), who chairs the conservative House Freedom Caucus, said full expensing is too costly, especially as Republicans have failed to coalesce around ideas to offset the price tag of tax reform.

“Larger companies plan out their capital investments a number of years in advance, so full expensing won’t necessarily incentivize them to spend more,” Jane Rohrs, director for the Federal Tax Accounting Periods, Methods & Credits Group at Deloitte Tax LLP, said in an interview.

Policy Price Tag

That tax incentive to buy more machinery is one of the key drivers of economic growth in the House GOP plan, according to the Tax Foundation’s models. On a static basis, the provision would cost $2.2 trillion over a decade, according to the estimates. But after accounting for economic growth, that number would be reduced to $883 billion over 10 years.

However, the Joint Committee on Taxation is likely to provide less rosy dynamic scores on full expensing, Ekins said. The Tax Foundation’s models find more growth from full expensing, whereas the JCT’s estimates are more conservative.

Brady framed the elimination of interest deductibility as the cost of full expensing, in a discussion with reporters June 15. “It’s what allows us to get to full and unlimited expensing,” he said.

He has indicated the committee could allow exceptions for interest deductibility, and could let small businesses, regulated utilities, and existing debt keep the tax break. As discussions continue, the cost of these provisions could lead Brady to pull back slightly from full expensing, Joseph Rosenberg, a senior research associate in the Urban-Brookings Tax Policy Center, said.

“Rather than move all the way to a consumption tax, maybe we only move closer to that,” Rosenberg said. Instead of full expensing, bonus depreciation could be made permanent or expanded to include more assets.

Bonus expensing allows businesses to immediately deduct 50 percent of the cost of their investments in equipment, machinery, and other short-lived property. This tax provision has been extended consistently since 2008.

Big Company Considerations

“The trade-off between interest expense and immediate expensing isn’t a good trade-off for them in terms of financial accounting,” said Rohrs, a former JCT official who now advises large companies on tax accounting issues. “Interest expense is a permanent benefit versus full expensing, which is just a timing benefit.”

Larger companies, especially those that are publicly traded, might also be reluctant to increase spending because company executives look to other measures, such as the tax rate, in their financial statements, Lily Batchelder, professor of law and public policy at NYU School of Law, said. Expensing isn’t factored into a company’s “book” tax rate so when corporate managers make investment decisions, they aren’t looking at that, she said.

Batchelder published a working paper in January that said full expensing could provide little benefit or even decrease investment among very large and public companies. The Tax Foundation’s Ekins disagreed, saying the number of cash-flow positive options a company could choose to invest in would increase if full expensing were available.

Full expensing provides another benefit, beyond growth, Ekins said: It’s much simpler for businesses to track. Under the current system, purchases are depreciated over several years, depending on the asset type. Full expensing would allow the company to take the entire deduction in the first year and then carry forward any additional net operating losses.

“When you use full expensing you take a lot of the compliance costs out of the equation,” Ekins said. “Shortening the assets’ lives would do the same thing—reducing the compliance costs” of meeting Internal Revenue Service requirements.

This is true for small companies, Rohrs said. But large companies are already tracking assets for financial accounting purposes, so it wouldn’t be a major administrative simplification, she said.

Rates Over Expensing

For some, it doesn’t have to be a choice between interest deductibility and full expensing. Lawmakers should lower the corporate rate beyond the 20 percent called for in the House GOP tax blueprint, instead of moving to full expensing, a Koch Industries representative said.

“The 20 percent corporate rate contained in the Blueprint could be lowered substantially if expensing were curtailed or eliminated,” Philip Ellender, president of Koch Companies Public Sector, said in a statement. “Lowering the corporate tax rate will provide more economic stimulus than immediate expensing.”

Most large companies would prefer a lower rate over full expensing, Rohrs said. A rate reduction is a cut in “actual taxes,” she said.

Still, full expensing has gained a lot of popular support, especially among groups pushing for lower taxes and fewer regulations. More than 20 conservative groups sent a letter to Congress June 13 calling for full expensing as one of three main priorities in tax reform.

“The political question is if you are going to pair expensing with interest deductibility. You already have 50 percent bonus and accelerated depreciation rules,” Rosenberg at the Tax Policy Center said. “Are companies really going to be willing to give that up for expensing? That’s going to be a hard sell.”

To contact the reporter on this story: Laura Davison in Washington at lDavison@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

For More Information

The Tax Foundation's full expensing estimates are at http://src.bna.com/pY1.

Batchelder's working paper is at http://src.bna.com/pVW.

The letter from conservative groups to Congress is at http://src.bna.com/pQ8.

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Daily Tax Report