Don’t Believe the Hype: Permanent “Bonus Depreciation” Not a Positive Step Toward Tax Reform

The House has voted to convert “bonus depreciation” — a large, temporary tax break that policymakers adopted during the recession that lets businesses take bigger upfront tax deductions for certain purchases such as machinery and equipment — into a permanent feature of the tax code at very substantial cost.  The Senate should not go along for two fundamental reasons.

First, as we have explained in a previous paper, permanent bonus depreciation is fiscally irresponsible — costing $276 billion over ten years, according to the Joint Tax Committee — and delivers relatively little economic benefit, even as a temporary measure.

Second, and our focus here: despite what some conservative champions suggest, permanent bonus depreciation would not represent a positive step toward tax reform.

Several conservative groups — including Americans for Prosperity and Americans for Tax Reform — claimed in a letter to lawmakers that “making bonus depreciation permanent would be a massive victory in the cause of tax reform.”  That’s because, they wrote, “[f]ull expensing, a dream of tax reformers going back to the original supply siders, would be within reach.”  Full expensing would enable businesses to deduct the full cost of these purchases in the year of purchase.

Supply-side dreaming should indeed be a wake-up call to Congress, for it suggests that bonus depreciation — or, full expensing — would come wrapped in a package with a host of other questionable items.

Americans for Prosperity, for instance, outlined a tax reform plan that not only embraced full expensing but also included:

• Cutting the tax rate on corporations’ foreign profits essentially to zero; 

• Repealing the estate tax; 

• Eliminating all limits on contributions to retirement accounts, which would primarily benefit very affluent individuals; and 

• Slashing the top income tax rate.  (Americans for Prosperity cited House Budget Committee Chairman Paul Ryan’s proposal to cut the top rate from 39.6 percent to 25 percent and Senator Rand Paul’s proposal to replace all tax brackets with a flat 17 percent rate.) 

These priorities have two common elements:  a very large drain on federal revenues and a very large tilt toward the nation’s wealthiest individuals.  This tax reform dream would be injurious to working and middle-class Americans, who would have to pay higher taxes to help make up for the massive revenue losses, face deep cuts in key programs — likely including programs such as Medicare — to accommodate the large revenue losses, or both.

Congress should make sure this doesn’t become a reality.  The Senate can start by declining to go along with the House’s irresponsible action on bonus depreciation.