Extending bonus depreciation makes economic sense

In an effort to stimulate the economy by encouraging business purchasing in 2009, the American Recovery and Reinvestment Act extended the capital investment incentives passed as part of the 2008 Economic Stimulus Act.Specifically, ARRA temporarily extended, through the end of 2009, tax relief that encourages businesses to make timely capital investments that will help stimulate the economy. As a result, business purchasing increased in the last two quarters of 2009 after a year and a half of decline, according to data from the Bureau of Economic Analysis.In June, Senate Finance Committee Chairman Max Baucus and ranking member Chuck Grassley filed Senate Bill 3513, “The Bonus Depreciation Extension to Create Jobs Act,” to again extend that relief through 2010. This bipartisan proposal would enable all businesses, regardless of their size or research and development capabilities, to invest in new equipment that would help them grow and thrive.One of the biggest challenges businesses have faced throughout the current economic recession is that it is increasingly difficult to access the capital they need to operate, grow and create new jobs. By reducing the first year’s tax bill for major capital purchases, the bonus depreciation allowance encourages companies to make these investments, and the savings generated can be used to keep employment levels stable.Bonus depreciation benefits companies large and small, and across a wide range of industries — from manufacturing to telecommunications to construction. In fact, 41 national business organizations representing a broad spectrum of industries have voiced their support for the bill.In his State of the Union address earlier this year, President Obama urged Congress to “provide a tax incentive for all large businesses and all small businesses to invest in new plants and equipment.” Bonus depreciation extension would do just that.Normally, businesses recover the cost of equipment and other capital investments through depreciation deductions spread evenly over several years. The bonus depreciation allowance provides a higher amount of depreciation earlier in the process. This tax incentive stimulates investments in tangible equipment and other property in the near term by enabling businesses to write off their cost more quickly. The resulting savings can in turn be used to preserve or even grow jobs.Specifically, the Internal Revenue Code allows businesses to recover the cost of capital expenditures over time according to a depreciation schedule. In both 2008 and 2009, Congress temporarily allowed businesses to recover the costs of capital expenditures made during those years faster than the ordinary depreciation schedule would allow by initially deducting 50 percent — increased from 30 percent — of the cost of depreciable property acquired during those two years for use in the United States.The bill filed in June would extend that allowance through the end of 2010.Certainly this would not be the first time bonus depreciation was used — and used successfully — as an economic stimulus. In fact, in the last decade alone, bonus depreciation has been used four times to stimulate the economy and preserve American jobs.During 2003 and 2004, bonus depreciation contributed to the creation or retention of at least 100,000 jobs. It is no surprise that economists have rated bonus depreciation as one of the most economically productive economic stimulus initiatives.The Institute for Policy Innovation, in a 2001 study, estimated that every dollar of tax relief dedicated to accelerated depreciation results in approximately $9 of GDP growth.Bonus depreciation promotes both capital investments and job creation, and it is sound public policy to extend it for an additional year.
James T. Brett is president and chief executive of The New England Council.

Categories: Opinion