One of the Most Crucial Aspects of Tax Cuts & Jobs Act Is In Danger of Expiring
The Tax Cuts and Jobs Act (TCJA) is the signature conservative legislative achievement of the 21st century. Not only did 80 percent of taxpayers receive a significant tax cut, but the highest percentage of Americans in Gallup survey history report feeling they are better off financially than they were a year ago. Unfortunately, one crucial element of the tax reform law is in danger of being phased out in just a few years.
One of the most important provisions of the TCJA allows companies to immediately write off investments made in the business. This is a logical and beneficial provision — not only does it encourage investment, an economically productive activity, but there is no way for businesses derive any benefit without investing. This so-called “full expensing” approach in TCJA replaced long, complicated depreciation schedules with a simplified system that encourages capital investment.
But absent legislative action, the American tax code will default back to a complex and burdensome system that delays those tax write-offs for years. Under this approach, businesses must refer to a complicated system of recovering investment costs through the tax code over extended periods of time known as Modified Accelerated Cost Recovery System (MACRS).
If a business wants to take advantage of MACRS, they must consult cost recovery schedules that can draw out the depreciation period anywhere from three to fifty years, depending on “property class.” Navigating this bureaucratic quagmire can be a nightmare — prior to the TCJA, businesses spent over 448 million hours a year just to comply with these rules, for an estimated total of $23 billion in compliance costs to the American economy.
And it’s more than just mere inconvenience to businesses’ accounting departments. Cash on hand today is more valuable than cash in the future, because cash on hand can be reinvested and put to productive uses right away. Asset value recovered decades later has also been subjected to decades of inflation, further reducing the value of the benefit.
The TCJA aimed to fix all this by implementing full expensing. Full expensing allows businesses to sidestep asset depreciation schedules and receive an immediate tax deduction for their capital investments the year the asset was purchased. This means no MACRS, no poring over complicated IRS documents, and no waiting years to receive the benefit of a tax deduction.
In truth, the main drawback to full expensing is political, and it comes from the quirks of budget scoring. Legislative proposals are scored by the nonpartisan Joint Committee on Taxation (JCT) over a ten-year budget period, and despite the fact that full expensing ultimately costs the federal government next to nothing in the long term, over a ten-year budget window it appears to be a major expense.
That’s because under drawn-out depreciation systems, the tax deduction businesses receive for capital investments is often dispensed over periods longer than the ten-year budget window, leaving the federal government with more tax revenue in the short term. Full expensing, on the other hand, gets the short end of the stick when it comes to this budgetary scoring quirk, appearing to “cost” the federal government a significant amount of revenue in the short term. In reality, the federal government provides the same deduction regardless of the system over the long term — it’s just a matter of when.
The need to adhere to budget reconciliation rules meant that Congress only had a limited amount of “room” to work with, however, when it came to the budgetary effects of the tax reform law. Consequently, though full expensing did make it in to tax reform, so too did a phase-out of the provision — by 2027, full expensing would be phased out entirely.
Fortunately, some in Congress are conscious of the need to make full expensing permanent before this phase-out comes into effect. Senator Pat Toomey (R-PA) is planning to release legislation that would make full expensing a permanent part of the tax code.
Other members of Congress should follow Senator Toomey’s lead and set aside political manipulation of the quirks of budget scoring in favor of supporting legislative action to preserve an important element of the tax reform law. After all, if opponents of the TCJA writ large are concerned that businesses have responded to the tax reform law by engaging in stock buybacks rather than investing, they should certainly support the most significant element of the TCJA that encourages investment.