The House Ways and Means Committee is scheduled to consider a bill authored by Rep. Pat Tiberi (R-OH) to make 50 percent first year expensing (aka bonus depreciation) permanent. The bill would also make a critical policy change that would allow companies with stored corporate Alternative Minimum Tax Credits (AMT) to be used more quickly in lieu of bonus depreciation.
The underlying policy has long had bipartisan support – which makes sense because economists of all stripes confirm that reducing the tax cost of capital investment is a positive for jobs and economic growth. A basic premise of economic theory is that investment is a positive function of an increase in demand and a negative function of cost. The cost of capital to a firm includes three components: the price of capital equipment, the cost of financing the equipment and the tax treatment of investment. 50 percent expensing lowers the after-tax cost of capital and increases the number of profitable projects a firm can undertake, helping spur the growth in business investment.
The NAM has long supported the continuance of this on-again, off-again, tax provision which has been included in the tax extenders package while also supporting making this provision permanent as would happen in Rep. Tiberi’s bill. In fact, earlier this year the NAM released a study on the impact the enactment of a pro-growth, pro-manufacturing tax reform plan would have on our economy. The study, A Missed Opportunity: the Economic Cost of Delaying Pro-Business Tax Reform takes a close look at the economic impact of enacting a five-prong pro-business tax package similar to NAM’s priorities and concludes that lack of action on pro-business tax reform is costing the U.S. economy in terms of slower growth in Gross Domestic Product (GDP), investment and employment. One of the policies that was studied was the impact of full expensing in addition to a lower corporate tax rate, lower rates for pass through businesses, a permanent R&D incentive and a shift to a competitive international tax system. The report finds that over a ten-year period, a pro-business tax plan would increase GDP over $12 trillion relative to CBO projections – and over 58 percent of the impact is attributable to the expensing and R&D provisions. The study also found that enactment of these policies would increase investment by over $3.3 trillion – with over four-fifths attributable to full expensing and the reduced corporate and individual tax rates.
Also, just today, the non-partisan tax research group, the Tax Foundation, released a paper updating the impact of permanent 50 percent first year expensing. Their paper, like our study, confirms that making this policy permanent creates job, adds to the capital stock and increases investment.
While the policy has enjoyed bipartisan support for many years now, there continues to be a difference of opinion regarding how long the policy should be enacted for. For manufacturers, it’s simple. Capital investment often requires several years of planning and in an already uncertain world with challenges confronting businesses every day, uncertainty regarding taxes is not something any company should have to continually be confronted with. That’s why the NAM urges members of the Ways and Means Committee to support Rep. Tiberi’s bill tomorrow and put an end to this tax uncertainty and allow manufacturers to lead the economic resurgence we all agree is needed.