The Anniversary of the '86 Tax Reform Is An Opportunity to Highlight Tax Priorities
Thirty years ago tomorrow our government achieved what many now consider a monumental undertaking. A divided government came together and passed meaningful tax reform to boost the economy and make the tax system fairer. President Reagan signed it into law on October 22, 1986.
Tax reform could be back on the national agenda next year. It is important that lawmakers keep in place tax policies that have long served to promote domestic investment and jobs, as they did in 1986.
The 1986 tax reform act represented a political, ideological, and regional compromise to end tax shelters, close perceived loopholes, take low earners off the income tax rolls, cut back deductions and credits, and reduce tax rates. An important part of that compromise was the retention of accelerated depreciation for businesses seeking to invest in new equipment and machinery at home.
Accelerated depreciation entered our tax law six decades ago as a way for businesses to rapidly recover their cost of domestic investment. It has remained in the tax law, in varying forms, ever since. Called the Modified Accelerated Cost Recovery System (MACRS) in The Tax Reform Act of 1986, the policy has helped stimulate domestic investment by manufacturers, farmers, and other businesses in new and innovative machinery to improve the efficiency and competitiveness of the economy and thereby boost wages and the standard of living. MACRS remains the law today.
By stimulating domestic investment, MACRS helps ensure that U.S. businesses adopt the latest technological innovations and stay fully competitive with their counterparts in Europe, China, Japan, and elsewhere. Congress has no control over the policies that are helping other countries succeed in the global economy, but it can ensure that American businesses have the tools they need to remain global leaders.
Tax observers in Washington have sometimes suggested cutting back on MACRS to offset the budget cost of other tax cuts. But such a tradeoff would amount to compromising the country's future economic strength. Without MACRS, companies would confront a higher cost of capital for their investments. At the margin, the higher cost of capital would deter investment. For example, one study by Quantria Strategies found that the cost of capital for machinery across all industries would go up by more than 8 percent.
Another study by Quantria Strategies found that cutbacks in MACRS would generate tax revenue mainly in the early years and thus would not serve as a budget offset for permanent tax cuts. According to the study, any immediate revenue gained by eliminating MACRS would be overtaken by budget shortfalls of $80 to $108 billion per year in less than a decade.
Cutbacks in MACRS would therefore not only damage the ability of U.S. businesses to invest in innovative equipment and machinery but would also drive increased long-term budget deficits if used as a budget offset for permanent tax cuts.
Last year Senate tax writers outlined the economic and budgetary pitfalls of cuts in MACRS in a Finance Committee working group report. More recently, House tax writers have suggested that, rather than cutting back MACRS in tax reform, the better approach would be to shift MACRS to full first-year expensing of domestic investment.
So much has changed in our country since President Reagan signed into the 1986 tax reform act into law. However, today's lawmakers can take a lesson from the members of the 99th Congress who found compromise and prioritized sound economic policy, despite the politically divided chambers.
At stake in 2017 is much more than just tax dollars. American workers and their industries are relying on Congress to keep in place tax policies that promote domestic investment and jobs. MACRS has endured the test of time as a fundamental part of the tax code. Left in place, it will continue to serve the U.S. economy and its workers.