Sadly, the House Ways and Means Committee has turned on its head a proposal by its chairman, Dave Camp (R-MI) to repeal bonus depreciation for business capital investment. Instead of scrapping the measure, which Congress originally passed in 2008 as a temporary anti-recession tonic, the panel has voted to make the tax break permanent.
And, as if to highlight the panel’s disconnect from good tax policy principles, it added special depreciation rules for fruit and nut trees. I will resist all temptation to make a cheap joke here.
Ways and Means approved all this despite the staggering cost: $263 billion over 10 years plus another $24 billion for allowing firms to accelerate alternative minimum tax credits in lieu of bonus depreciation. Oh, and there is no evidence that these generous tax write-offs contribute to economic growth.
Bonus depreciation allows firms to write off half the cost of their capital investments in the year they are acquired. While it does little to encourage companies to purchase more equipment, corporate CFOs strongly support the tax break because it increases their upfront cash flow. According to Wall Street estimates, making bonus depreciation permanent would boost cash flow by $70 billion-a-year for S&P 500 firms alone.
Some supporters argue that temporary bonus depreciation can help jumpstart a stalled economy by encouraging businesses to accelerate investment while the tax cut is in effect. But research suggests that the impact of even a temporary subsidy is quite small. And there is no credible evidence that making bonus depreciation permanent would increase investment at all over the long run.
In part, that’s why Camp’s tax reform would have gone in a very different direction. He proposed eliminating all accelerated depreciation—including bonus depreciation and some inefficient industry-specific rules—to help finance a cut in the corporate rate from 35 percent to 25 percent. Accelerated depreciation allows firms to deduct the cost of equipment faster than it actually depreciates. Camp’s laudable goal: Depreciation rules that “would match more closely the true economic useful life of assets.”
True tax reform might have taken yet a third route. Under a consumption tax, firms would be allowed to immediately write-off (expense) the full cost of capital equipment in the year it is acquired. That model of fundamental reform would encourage savings—though it might also be more regressive than the current code.
Expensing would also eliminate the timing arguments that inevitably accompany equipment-specific depreciation schedules. (Is the useful life of that widget-stamper five years or seven?) But in return for expensing, firms would lose the ability to deduct the interest they pay on loans to buy that equipment (At the same time, financial firms would owe no consumption tax on their interest income).
But today, Camp–who is nothing if not a good solider—took neither of those roads. Instead, he led his committee on a side trip down the path of tax deform by proposing to make bonus depreciation permanent—and leaving the interest deduction untouched.
Today’s vote was just the latest twist in a strange journey for bonus depreciation. In 2008, Congress enacted the provision as part of broad stimulus legislation. For years, congressional Republicans argued that the entire stimulus was a terrible idea that should be repealed. Democrats, who claimed the tax break played an important role in reviving the economy, successfully insisted that it be temporarily extended in 2010.
Now, the parties have almost reversed roles. Republicans want to make the tax cut permanent while Senate Democrats would continue bonus depreciation, and 50+ other expired tax provisions, for only two more years. For the last time, they insist.
This would be amusing – except for that $263 billion price tag. It is a lot of money to spend for a corporate windfall that contributes little or nothing to economic growth.