Tax Breaks for Company Investments May Be Fading as Job Creator
For Joe McGlynn, executive vice president at Campbell Fittings Inc. in Boyertown, Pennsylvania, the benefits of a tax incentive to spur business investment are clear.
“It’s putting people to work right now,” McGlynn said. Campbell Fittings, a maker of industrial hose couplings, used the break to buy equipment that allowed the family-owned business about 50 miles northwest of Philadelphia to offer more innovative products at a lower cost to better compete with overseas rivals.
The investment paid off, and Campbell doubled its payroll in the past 18 months to 92 workers, who are receiving training in skilled labor and improving their standard of living, McGlynn said.
Overshadowed in the year-end congressional bickering over extending a payroll tax cut is the fate of so-called bonus depreciation and other expiring business tax breaks. The accelerated depreciation tax benefit allowed businesses to write off 100 percent of some capital investments made this year, rather than spreading it out over several years.
The incentive costs the U.S. Treasury little in forgone revenue, has bipartisan support and some companies say that in their experience it is doing what it’s supposed to: stimulate the economy.
The write-off will drop to 50 percent in 2012 if Congress doesn’t act to continue the full expensing. The House and Senate haven’t agreed on whether to include it in a broader tax measure.
President Barack Obama included extension of this tax break in his job-creation proposal in September. The administration estimated it would cost $5 billion over 10 years and be worth $85 billion to businesses next year.
“There’s a double benefit,” said Monica McGuire, senior director of tax policy at the National Association of Manufacturers, a trade group in Washington. “You have customers who want to buy plant machinery and equipment, and you have sellers and manufacturers who want to make it and sell it.”
That’s been the case at truck-maker Utilimaster Corp. in Wakarusa, Indiana. Bonus depreciation gives customers an incentive to move up replacement of their vehicles, and that translates into more business and job openings at Utilimaster, a unit of Spartan Motors Inc. (SPAR), said John Marshall, senior vice president of sales and marketing.
“Our business this year is up 30 percent,” and while not all of the growth can be attributed to the expensing tax break, it’s helping, he said.
The company hired about 300 people this year to bring its workforce to about 940 people. “Absolutely, it’s helped with hiring,” Marshall said. That, in turn, is bolstering the area’s economy because more than 70 percent of Utilimaster’s suppliers are in a 30-mile radius.
Bonus depreciation of between 30 percent and 50 percent has been used by U.S. lawmakers as a tool to stimulate the economy off and on since 2001.
The most recent incentive, passed by Congress in December 2010, lets companies deduct 100 percent of many capital investments made from Sept. 9, 2010, through the end of 2011.
The benefit doesn’t increase the total amount a company can write off, it allows the depreciation to be accelerated. Likewise, the break doesn’t cost the Treasury in the long run; the revenue just comes in later.
“It’s an attractive policy in an environment where there’s a desire to stimulate the economy and very real concerns about the budget deficit,” said Matthew Shapiro, an economics professor at the University of Michigan.
While many businesses hail the benefits, economists differ on the effectiveness of the tax break and say its benefits for the economy are difficult to measure.
It’s hard to know whether the depreciation benefit helped boost overall business investment in capital until trends on what happens to investment after the break expires can be measured, Shapiro said.
“Investment is one of the stronger parts in the economy, and there’s an assumption that bonus depreciation has been a part of that,” he said.
Business investment in equipment and software increased 10.7 percent in the first three quarters of this year from the same period in 2010.
‘Zero Percent Loan’
Economists such as Neil Dutta at Bank of America Corp. in New York, say that, because interest rates are low, the cost of financing is already at a minimum so that dilutes the incentive to invest based on a tax break.
“Accelerated depreciation is like giving a zero percent loan when interest rates are already near zero,” he said.
Capital spending will remain steady over the next year even if the tax break expires, Dutta said.
“The only reason companies will alter their capital spending plans is if they think the economy is going to boom in 2012,” he said.
Aneta Markowska, a senior U.S. economist at Societe Generale SA in New York, disagrees, saying business investment spurred by the tax break is helping drive momentum in U.S. economic growth.
Capital expenditures have been higher than what would typically be justified given the current economic conditions, and the boost in investment may help explain why fewer workers are filing claims for jobless benefits, she said. “If you put equipment in place, you need people to run that equipment.”
While economists may disagree on the benefits of bonus depreciation, Jim Parker, chief executive officer of Carter Machinery Co., a Caterpillar Inc. (CAT) dealer in Salem, Virginia, has all the evidence he needs in an uptick in orders for earth- moving and other machinery.
Purchases that resulted from the tax advantage were about 20 percent of sales, or about $6 million, Parker said.
Contractors who have work to do “are clearly taking advantage of the bonus depreciation,” Parker said. “It’s an incredible boon for them and it’s driving the behavior it was intended to create.”
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