There is something interesting about tax policy. The mere possibility that it may change even if it hasn't changed can cause real economic damage. This leads to debate over bonus depreciation. This is a provision that, in the grand tradition of tax policy, Washington has become unnecessary complicated, and now has caused economic uncertainty, subject to arbitrary expiration dates.
The bonus depreciation introduced in the 2017 Tax Cuts and Employment Act was a simple concept. Rather than being depreciated over many years, businesses can quickly deduct all costs of capital investments. This was a boon from corporate investment, encouraging businesses to upgrade equipment, expand operations and modernize their infrastructure. It was essentially a policy designed to make economic growth the forefront by making today's investments cheaper than drawing deductions over time.
But Washington has made this provision temporary with his infinite wisdom. It will start to be phased in 2023 and completely disappear by 2027 without Congressional action. What if companies suspect that tax incentives could return, but when they don't know? They delay investment. The mere uncertainty about whether Congress will extend bonus depreciation is sufficient to slow capital expenditures as businesses refrain from large purchases in hopes of better transactions.
This is not a guess. Economist Joe Lavona recently pointed to a surge in economic policy uncertainty index. This reached its highest level since 2020, mainly due to fiscal and tax policy concerns. Companies don't like unpredictability. Federal Reserve data shows a sharp slowdown in business equipment production, suggesting that businesses are already pulling back capital expenditures. The stock market has noticed that capital-intensive industries such as manufacturing and technology show weakness.
In a recent note, Lavorgna wrote:
One important factor in the 2017 Taxation and Employment Act (TCJA) was a 100% bonus depreciation on capital expenditures (CAPEX). This provision allowed businesses to immediately deduct all expenses of business equipment expenditures. The intention was to galvanize CAPEX, an important input to improve productivity growth. However, recent Fed data suggests that business equipment production will slow the previous quarter abruptly, reducing spending on inflation-adjusted equipment in GDP accounts. This is all the reasons to expand TJCA as quickly as possible, thus eliminating headwinds towards business uncertainty and the associated expansion.
Tax uncertainty works like an invisible tax. This discourages businesses from hindering investment, employment and expansion. If Congress makes bonus depreciation permanent, then companies have the clarity they need to make long-term investments. Instead, the Washington Dithers left executives to play speculation games about what the tax code for the year or two looks like from now on.
The Biden administration has spent years arguing that corporate tax cuts need to be reversed to increase government spending. But as a Republican who currently controls both Congress and the White House, the path to a growing tax policy reset is clear. The question is whether Congress will act decisively or will they continue to deal with corporate investments like political football?
The Job Creators Network correctly warns that Washington cannot afford to wait indefinitely to provide tax certainty. CEO Alfredo Ortiz recently noted that companies now need clarity.
If Washington's goal is to maximize business paralysis, it's successful. If your target is economic growth, then recovering bonus depreciation is easy.
