Breaking News

Tweet TWEET

Bush-Era Tax Write-off Would Continue in Republican Plan

Republicans are taking a temporary U.S. tax incentive from the waning days of George W. Bush’s presidency and trying to extend it indefinitely.

The $287 billion business tax cut known as bonus depreciation accelerates deductions for capital investments, providing a boost to companies including AT&T Inc. (T) and Verizon Communications Inc. (VZ)

The proposal, expected to be approved by the House Ways and Means Committee today in Washington, would shift U.S. corporate tax policy in favor of capital investment.

“You’ve got money on the sidelines because of our tax code,” Representative Pat Tiberi, an Ohio Republican and the bill’s author, said in a telephone interview yesterday. “This we believe would not only increase economic activity but would also increase federal revenue.”

Republicans’ plan would remove an expiration date from something conceived as a short-term incentive. The proposal, which is unlikely to become law any time soon, drew quick support yesterday from groups such as the Business Roundtable and the National Retail Federation.

The plan runs counter to Republicans’ broader goals for reshaping the U.S. tax code.

Just three months ago, Ways and Means Chairman Dave Camp of Michigan introduced a draft revamp of the U.S. tax system that would stretch out deductions for equipment purchases and put the revenue toward reducing the corporate tax rate to 25 percent from 35 percent.

Research, Advertising

Camp also proposed allowing deductions for research and advertising expenses to be taken over a multi-year period.

Groups such as the Tax Foundation and Americans for Tax Reform criticized Camp’s plan on depreciation and pointed to nonpartisan estimates showing that the proposal would reduce capital stock.

Now, Camp is moving in the opposite direction by proposing faster write-offs compared with the underlying tax law, which attempts to align deductions for capital investments with the multi-year stream of income they create.

Bonus depreciation generally lets companies deduct an additional 50 percent of the cost of investments the first year, on top of the regular depreciation schedule.

Republicans are moving away from the whole point of bonus depreciation as a temporary stimulus, said Representative Sander Levin of Michigan, the top Democrat on Ways and Means.

The $287 billion, he said, comes on top of $310 billion in other tax cuts that the tax-writing panel has approved making permanent without offsetting the effect on the budget deficit.

$600 Billion

“You’re talking about $600 billion, which is a lot of money,” Levin said in a telephone interview yesterday. “I mean, tax cuts pay for themselves?”

Tiberi said Republicans on the Ways and Means panel are focused on policies that can speed up the economic recovery and have the most benefit.

David Hulse, an accounting professor at the University of Kentucky, said the fact that the bonus depreciation break has been around since 2008 diminishes its attractiveness for companies.

“As you continue to have it available longer and longer and longer, that acceleration just goes away,” he said.

As the broader changes Camp proposed became less politically feasible, he announced his retirement from Congress and turned his attention to the dozens of tax breaks that expired at the end of 2013.

Choosing Breaks

Rather than continue almost all of the tax benefits through 2015 as the Democratic-led Senate Finance Committee did, Camp and House Republicans have chosen to permanently extend some breaks. Today, the committee will vote on five bills related to charitable donations, along with the bonus depreciation plan.

Bonus depreciation has bipartisan support as a way to encourage investment during downturns.

Bush deployed bonus depreciation twice during his presidency to encourage companies to accelerate spending during an economic slowdown, once after the terrorist attacks of Sept. 11, 2001, and again in February 2008 near the start of the financial crisis.

Even as other pieces of economic stimulus expired, including a payroll tax cut for workers, President Barack Obama and Congress left bonus depreciation in place. They even temporarily expanded it in 2010 to full, immediate write-offs.

“This will help small businesses upgrade their plants and equipment, and will encourage large corporations to get off the sidelines and start putting their profits to work in places like Cleveland and Toledo and Dayton,” Obama said in a speech in Ohio on Sept. 8, 2010.

Capital Intensive

The biggest benefits of bonus depreciation go to capital-intensive companies that have enough profits to soak up the deductions and that make investments in long-term assets other than real estate.

“We make a fairly extensive and strong annual investment in our networks,” said Ed McFadden, a spokesman for Verizon, which plans to make $16.5 billion to $17 billion in capital investments this year, according to its annual report. “This type of legislation is helpful to those companies that make those kinds of multibillion-dollar annual investments.”

For example, the proposal would cut the effective tax rate on tractors to 15 percent from 27 percent and the rate on mining and oilfield equipment to 16 percent from 28 percent, according to the Congressional Research Service.

Matthew Shapiro, an economics professor at the University of Michigan who has studied bonus depreciation, said it would have a modest effect in encouraging new investment.

‘Useful Policy’

“It’s useful policy for short-run stimulus,” he said. “Many of the investment projects which might be eligible for bonus would have taken place over the last several years.”

The break will be less beneficial for makers of pharmaceuticals and software because they don’t rely as much on capital investment in hard assets, said John Buckley, a former chief tax counsel for Ways and Means Democrats.

“Do businesses invest because of accelerated depreciation?” he said. “Or because they have customers? I think it’s because they have customers. This doesn’t address the issue of demand for the services.”

Public companies may be less interested in taking advantage of the break than closely held companies are, because the timing differences don’t affect the bottom line of financial statements.

During a period of low interest rates, like the one the U.S. is in now, the effect of bonus depreciation is muted because there’s relatively little benefit in having money now as opposed to the future, said Eric Toder, a co-director of the Tax Policy Center in Washington.

Tax Arbitrage

In addition, because companies can deduct interest costs, he said, permanent bonus depreciation can lead to tax arbitrage and tax shelters as businesses combine the two benefits.

“The investments could lose money and you could still come out ahead,” Toder said. “You’re making uneconomic investments profitable.”

Tiberi said he isn’t concerned about that effect as much as he is about providing incentives for small and large businesses to grow.

“I worry more about a tax code that discourages investment, that discourages savings,” he said.

The bill is H.R. 4718.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editors responsible for this story: Jodi Schneider at jschneider50@bloomberg.net Laurie Asseo

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.