“YES” on Permanent Bonus Depreciation (H.R. 4718)

This week, the House will vote on H.R. 4718, a bill sponsored by Rep. Pat Tiberi (R-OH) 54%, to make permanent the provision in the tax code that allows companies to deduct 50 percent of the cost of capital investments in the first year.

Despite its name, “bonus depreciation” is not about giving an extra benefit or “stimulus” to businesses. In fact, it is a provision that substantially moves the tax code into the proper, neutral treatment of business investments. Allowing businesses to deduct 100percent of the cost of capital expenditures in the first year (sometimes referred to as “expensing”) is a key pillar of a neutral, consumption-based tax code. Bonus depreciation gets us half way there. As Heritage explains:

“Bonus depreciation is not really a bonus at all but moves tax policy substantially in the direction of a neutral tax base—a tax base that is neutral toward the decision about whether to invest or consume and neutral among different investment options. Markets, not the tax code, should dictate the level and composition of investment.”

In other words, bonus depreciation is exactly the kind of tax policy Congress should be pursuing: it is broad-based, meaning that it doesn’t favor one type or size of business over another; it is neutral, meaning it doesn’t favor one type of investment or spending decision over another; and, under H.R. 4718, it is permanent, meaning businesses won’t need to wonder if it will be in place from one year to the next, and they can make better long-term decisions.

Members should not hesitate to make bonus depreciation permanent, nor should they feel compelled to offer a “pay for” as reducing taxes does not require a budget offset.  Bonus depreciation itself has been a part of our tax code for years, and allowing it to expire would constitute a tax increase, specifically a tax increase on the cost of capital. As Heritage explains:

“The U.S. has not only the highest corporate tax rate in the world but one of the worst capital cost recovery allowance systems…In the absence of congressional action, bonus depreciation will expire for investments after December 31, 2013, and the cost of capital for firms throughout the country will increase substantially. This tax increase would move us away from a neutral tax base. It will therefore reduce investment and have an adverse impact on productivity, competitiveness job creation, and real wages.”

The House’s approach to H.R. 4718 represents a huge and important difference from the Senate’s misguided attempt to rubber-stamp all extenders on a temporary basis.

Heritage Action supports H.R. 4718 and will include it as a vote on our legislative scorecard.

Related:
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