Today’s Bloomberg BNA Daily Tax Report story covers the uncertainty about depreciation allowances and how it is impeding new investment and job growth in the restaurant and retail sector.
Legislation (H.R. 1265, S. 687) pending in both chambers would make permanent the 15-year depreciation schedule, which lawmakers and lobbyists said would provide businesses with the certainty they need to make long-term plans. The legislation is not scored, though a two year-plan covering tax years 2010 and 2011 that was enacted in December 2010 cost $3.6 billion over 10 years.
“There are projects to renovate retail spaces that are being delayed because of the uncertainty in the tax law right now,” Bernstein said. “And those delays in remodeling projects cost jobs.” Delays cost construction jobs, construction materials, the potential for increased foot traffic and sales, and more employment in the store or restaurant, she said.
Koenig said once the extenders phase is passed and substantive work on tax reform resumes, it is possible that lobbyists will ask lawmakers to look at an even shorter depreciation schedule.
“We would argue that 15 [years] may even be too high,” he told BNA, noting that in the restaurant industry, the franchisee/franchisor agreement often states that significant structural improvements must occur over a six- to eight-year period.
“We actually think that unlike some other extenders that may look at tax reform as a threat to their existence, we think we have a good story to tell in the tax reform debate,” Koenig said. “Ideally, we could argue that potentially a permanent fix for depreciation in this area could be less than 15 years.”
Lunsford agreed that something shorter than 15 years would make a big difference for her Pizza Hut restaurants.
“I don’t want to be greedy,” Lunsford said. “Would I like 10? Sure. But 15 is a heck of a lot better than 39.”
These points are concurrent with the key points from my recent Ways and Means written testimony on the impact of slower cost recover allowances:
- Determinates of U.S. Investment: Over the past three decades economics and finance experts have examined the question of whether financial variables such as cash flow and cash stocks have a significant effect on investment. Numerous economic analyses and surveys have concluded that financial factors are important in determining investment levels. For example, a 1998 empirical analysis by Professors Gilchrist and Himmelberg concludes that for the average firm in their sample, cash flow and cash stocks raise the overall response of investment to an expansionary shock by 25% relative to a baseline case where financial frictions (capital market imperfections) are zero.
- Accelerated Depreciation, the Cost of Capital, U.S. Investment and Jobs: If accelerated depreciation for equipment is repealed and replaced with economic depreciation which is generally longer than the current Modified Accelerated Cost Recovery System (MACRS), the cost of capital for new equipment will rise and investment is likely be as much as $191 billion lower in 2015 compared to the baseline. Each $1 billion decline in investment is associated with a loss of 23,300 jobs.
- Bonus Depreciation and U.S. Investment: Since the 4th quarter of 2007, which marks the beginning of the recession, through the 4th quarter of 2011, U.S. equipment investment has increased by 3.4%. Given the weakness of consumer demand during this period (real personal consumption expenditures increased only 1.8% during the past 4 years) it seems likely that accelerated and bonus deprecation have played a major role in sustaining investment in equipment.
As policymakers contemplate fundamental tax reform they need to weigh carefully the possible consequences of eliminating accelerated depreciation in return for a lower corporate income tax. It may be well to consider “paying for” corporate income tax rate reductions with cuts to entitlements for upper income individuals rather than eliminating proven investment provisions such as accelerated depreciation. Another option would be to move toward a consumed income tax where all investment is expensed.
