All is quiet in the streets of the nation’s capital as members of Congress have fled to their home districts for their annual August recess. But as is the case every August in recent years, our elected officials left a lot of unfinished business.
Among this incomplete work is the future of “bonus depreciation,” which is as contradictory as it sounds. This huge tax break allows companies to accelerate tax write offs for equipment and other infrastructure investment. First enacted to address the recession during the George W. Bush administration, it has been repeatedly re-enacted, expanded during the most recent economic collapse and finally expired at the end of 2013.
Defenders of bonus depreciation argue that this special tax break gives businesses a needed incentive to engage in risky infrastructure investments. But, as we noted previously, the Congressional Research Service published a report last month concluding that bonus depreciation doesn’t appear to have a meaningful impact on corporate investment decisions. In fact, the CRS argued, the only thing bonus depreciation is less good at than encouraging short-term investment is encouraging long-term investment.
Just when it seems the case for bonus depreciation cannot get any weaker, now business leaders have admitted that it has no effect on investment. A new survey from Bloomberg BNA confirms the CRS’s finding that the expiration of bonus depreciation is hardly ruffling a feather among most Fortune 500 corporations. BNA surveyed 100 leaders at large U.S. businesses to find out how, if at all, changes in bonus depreciation and related tax rules are affecting their decisions on capital expenditures, and found that 83 percent of these business leaders believed the expiration of these tax breaks has not affected their capital expenditures in 2014.
Nonetheless, the House of Representatives voted in July to make bonus depreciation permanent (at which point the term “bonus” would apparently no longer describe this break) at a projected cost of $276 billion over a decade.
While CEOs say this break doesn’t spur investment, this doesn’t mean that the business community is indifferent about the fate of bonus depreciation, of course. Even if businesses aren’t basing their decisions on these tax breaks, they certainly would welcome their extension. As former Treasury Secretary Paul O’Neill put it, “I never made an investment decision based on the tax code...If you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements.”
And, Washington being Washington, some lawmakers are quite interested not just in extending bonus depreciation but in broadening its scope. California Rep. Jeff Denham is renewing his call to make bonus depreciation a permanent feature of the tax code—and to extend this tax break to businesses investing in “fruit- and nut-bearing trees and vines,” presumably to benefit almond growers in his district. The bill passed by the U.S. House of Representatives last month would do both of these things.
The Senate has taken a different approach. The Senate Finance Committee approved a bill that would extend bonus depreciation, along with a package of additional tax breaks that mostly benefit businesses, for just two years. While the House has voted to make certain tax breaks (including bonus depreciation and several others) permanent, the Senate seems content to stick with Congress’s traditional, but very problematic, practice of extending such tax breaks (the infamous tax extenders) for a couple of years at a time. The nation would be better served if bonus depreciation, along with the rest of these tax breaks, were allowed to die.