The best that can be said for the “tax extenders” bill, approved in the waning days of the 113th Congress, is that it could have been much worse. After the November election, House and Senate leaders attempted to make all 55 special-interest tax breaks in the bill permanent instead of renewing them on a short-term basis, as per usual. The White House shot down that idea, which would have added more than $400 billion to the federal deficit over the next decade. Finally, all concerned settled on a $42 billion one-year renewal of the breaks, retroactive to Jan. 1, so that taxpayers can claim them on their 2014 returns — to be followed by a resumption of debate on broader tax reform in 2015.
The best that can be said for the “tax extenders” bill, approved in the waning days of the 113th Congress, is that it could have been much worse. After the November election, House and Senate leaders attempted to make all 55 special-interest tax breaks in the bill permanent instead of renewing them on a short-term basis, as per usual. The White House shot down that idea, which would have added more than $400 billion to the federal deficit over the next decade. Finally, all concerned settled on a $42 billion one-year renewal of the breaks, retroactive to Jan. 1, so that taxpayers can claim them on their 2014 returns — to be followed by a resumption of debate on broader tax reform in 2015.
The House approved this least common denominator Dec. 3 and the Senate did so Tuesday. Politically expedient though it may be, the bill is a pastiche of economic nonsense, and no provision illustrates this better than the so-called “bonus depreciation” rules for businesses. The tax code has long permitted companies to deduct gradually the costs of new equipment, buildings and the like; the sound economic principle is big-ticket items produce output over time, so the expense of acquiring them should be “matched” with that revenue stream. Bonus depreciation allows companies to claim a much higher than usual percentage of those deductions up front.
Historically, it has been used to fight recessions, on the theory that injecting cash into corporate coffers enables businesses to maintain capital spending. The current bonus depreciation law began in President George W. Bush’s 2008 stimulus package and has been adjusted and renewed periodically under President Barack Obama; it allows companies to deduct half the cost of new assets immediately.
Alas, several economic studies have shown that, in practice, bonus depreciation is “not very effective” as a boost to economic growth, in the words of a recent Congressional Research Service report — and probably less effective than other tax cuts or spending increases that have since expired. Tax break or no, many firms won’t invest at times of weak demand for their products; in any case, bonus depreciation affects only one incentive in what, for many companies, may be a highly complex tax-planning scenario.
Whatever stimulative effect bonus depreciation has, though, depends on its being both temporary and timely — i.e., that companies understand it will be available during recessions and only then. Extending the measure now amounts to a gratuitous handout; indeed, it’s been decreasingly necessary ever since the “Great Recession” officially ended in June 2009. Since the proposed one-year extension, which would cost $5 billion, is retroactive, it actually amounts to a windfall benefit for investment decisions corporations have already made.
In short, bonus depreciation provides only modest benefit as a temporary stimulus measure and none at all as a de facto permanent part of the code, which is what the extenders are. If Congress does nothing else to the tax code next year, it must purge it of this provision.