THE ACCELERATOR for October 23rd, 2017

News for Driving Economic Growth





 The Unified Framework for tax reform proposes to allow full, first-year expensing of the cost of depreciable assets, excluding buildings, for at least five years.  CRANE members support the proposal since the proposal would mean the preservation of a robust system of cost recovery for domestic investment in business equipment and machinery. Domestic investment means modern, and more-productive, factories, workplaces, and infrastructure. 

 CRANE offers the following historical and tax-policy perspectives on the expensing proposal: 


Shift from 2014.

The approach of the Framework represents a 180-degree shift from the approach to cost recovery taken in the comprehensive tax reform act introduced as H.R. 1 in the House in 2014. That bill would nearly have eliminated accelerated depreciation (i.e., the Modified Accelerated Cost Recovery System – MACRS) and, at the same time, allowed bonus depreciation to expire. Those changes in law would have increased the cost of capital for domestic investment and thus worked in the opposite direction from the tax-rate reductions and other provisions in the bill meant to boost economic growth.  Additionally, the changes would have generated an early revenue spurt that would have declined in later years, thus making the changes unworkable as permanent tax offsets for reduced tax rates or other tax reforms. 


The familiar bonus depreciation model. 

Because the expensing proposal in the Framework excludes buildings from eligibility, the structure of the proposal, broadly speaking, is comparable to that of bonus depreciation under current law. Bonus depreciation has been in effect for most of the last 16 years, and tax writers in Congress are fully familiar with it, as are businesses. The statutory details applicable to bonus depreciation have become well accepted by taxpayers, and utilization of bonus depreciation is perceived as posing little or no tax risk.          


Similarity to extension of bonus depreciation

Bonus depreciation is scheduled to phase down after this year and expire after 2019, but the expensing proposal would take its place, at least for five years. Since the combination of MACRS and bonus depreciation, at the current 50% level, allows businesses to deduct typically 80% or more of the cost of domestic investments in the first two years, the net result of those two provisions nears the result of first-year expensing. Thus, the expensing proposal can be viewed as a close approximation of an extension of bonus depreciation at the 50% level. CRANE assumes that the Framework would leave MACRS in place, both with respect to assets not qualifying for expensing and for years in the future if expensing were to expire (but the Framework does not specifically so state). 


Bipartisan support for bonus depreciation.  

Support for bonus depreciation in Congress has been fully bipartisan from its inception. Both the Obama administration and the George W. Bush administration supported it, as well.   


Bonus depreciation as statutory model

The statutory language for bonus depreciation has evolved over time to address numerous technical and policy issues. Tax writers would presumably not need to develop new language for the expensing proposal; they could simply adapt the existing bonus depreciation language to the task. In fact, an alternative to the expensing proposal would be a simple extension of bonus depreciation, as proposed in S. 1144, introduced by Senators Thune and Roberts.


Long-term historical trend.  

As proposed in the Framework, expensing would represent the continuation of a six-decade-long historical trend toward more-rapid cost recovery for domestic investment in business machinery and equipment. The case for tax policies that facilitate such domestic investment and thereby fosters modern factories, workplaces, and infrastructure is just as strong now as it was in 1954 when Congress made accelerated depreciation a permanent part of the tax code. The addition of bonus depreciation, along with increased expensing for small businesses, are the latest steps in the long-term trend.       


Exclusion of buildings

By excluding buildings from the expensing proposal and thus following the pattern of bonus depreciation, the Unified Framework avoids the substantial legislative uncertainties that would result from allowing a first-year deduction of the entire cost of buildings. The inclusion of buildings would likely create budgetary and political pressure on tax writers to safeguard the tax base through steps such as eliminating the interest deduction and strengthening or maintaining the alternative minimum tax.


In sum, CRANE urges Congress, in tax reform, to preserve a robust system of cost recovery for domestic investment in business machinery and equipment. The expensing mechanism proposed in the Unified Framework, together with the preservation of MACRS, appears to represent such a system.    


THE ACCELERATOR is the voice of the CRANE Coalition – Cost Recovery Advances the Nation’s Economy.  CRANE is made up of American companies and associations focused on preserving a robust system of cost recovery in the tax code to ensure that businesses have the capital needed to continue driving economic growth and job creation here at home. CRANE has sponsored research on the economics and budgetary aspects of cutbacks in cost recovery. As Congress and the administration endeavor to reform the U.S. tax code in the coming months, CRANE will continue to urge the preservation and enhancement of accelerated depreciation. Follow us on Twitter.