Koch Study Takes Aim at Full Expensing in House GOP Tax Plan

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By Laura Davison

Koch Industries Inc., in its attempt to stop the House GOP tax plan, has moved on from criticizing the border tax. Full expensing is the new target, according to a study from the company.

Lowering corporate tax rates is a more effective way to spur economic growth than full expensing, which allows companies to immediately deduct the cost of new equipment and machinery, it said.

The study, conducted by Quantria Strategies, suggests the House plan could have a 17 percent tax rate—lower than its current 20 percent rate—if it eliminated the border adjustment tax and full expensing. The plan could retain the deduction for interest expense and make the 50 percent bonus depreciation permanent, it said.

Full expensing “for us, doesn’t lead to any more investment, which doesn’t lead to any more jobs,” Evan Alexander, Koch’s director of public sector business development, said at a briefing May 16. “Lowering the rate from our commercial perspective is eight times more potent than a little incremental change in how fast we recover cost. Economists, we have found, don’t agree with this. But this is actually how we think about capital and how we deploy it.”

The study comes as Trump administration officials and GOP senators are expressing doubts about key revenue raisers in the House plan, such as the border adjustment tax and elimination of the deduction for net interest expense. Full expensing would cost $1.9 trillion over a decade, according to the Koch study. Moving away from that could give lawmakers more wiggle room to lower tax rates without the border tax.

Past Problems

Koch Industries has previously criticized the House GOP tax reform blueprint, particularly the border adjustment tax, which taxes imports but not exports. The idea has failed to gain traction in the Senate and at the White House, but House Republicans say they are continuing to refine the provision.

Tax aides in the Senate have said they’ve heard concerns about allowing for full expensing, because it could cause inflation and because some larger companies prefer rate cuts over immediate cost recovery.

Two economists said the Koch study is hard to analyze because it doesn’t clearly define the methodology used to reach the conclusion that rate reductions are preferable to quicker cost recovery for achieving economic growth.

“Their conclusion that a corporate rate cut would have a larger impact than expensing is counter to standard economic analysis,” said Kyle Pomerleau, director of federal projects at the Tax Foundation. “Cost of capital analyses show that expensing removes investment from the tax base, basically bringing the effective rate to zero. A corporate rate cut lowers the tax, but still places some sort of burden on investment.”

Economist Alan Auerbach of the University of California, Berkeley, who advised House Republicans on their tax plan, noted that the study didn’t factor in the macroeconomic effects of border adjustment. That seems like a “major omission,” he said.

Expensing Defense

A Joint Committee on Taxation report (JCX-19-17) released May 16 said that slowing cost recovery methods could reduce investment even if the corporate tax rate is reduced at the same time.

A 2015 study, also conducted by Quantria Strategies but for a different client, found that slowing cost recovery, even coupled with rate reduction, would lead to slower economic growth.

“Full and unlimited expensing may be the single most pro-growth provision in tax reform because it is all about driving productivity and investment which really drive wages in the U.S. economy,” House Ways and Means Committee Chairman Kevin Brady (R-Texas) told reporters May 16. “We’ll continue to bring that proposal and our ideas on how to unleash business investment to the table.”

The Ways and Means Committee is continually receiving information from the JCT about how provisions in the tax plans score, Brady said. But those numbers haven’t been made public yet.“We’re getting more clarity now about growth from tax provisions than we’ve ever had,” Brady said. “In working with Treasury and their sources, I’m confident we’re going to get to good, clear growth impacts in these revisions. Better than we’ve ever had.”

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 2017 Koch study is at http://src.bna.com/oUa.

The JCT report (JCX-19-17) is in TaxCore.

The 2015 Quantria study is at http://src.bna.com/oV2.

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