President Obama has a less than stellar reputation with corporate America, but he gave businesses a sweetheart tax deal that tacked several billions of dollars onto the national debt.
As part of his 2009 stimulus package, the president tried to jumpstart the economy for part of 2010 and 2011 by letting companies deduct the full cost of new computers, machinery and office equipment—what accountants call “bonus depreciation” The plan halved the size of the deduction for 2012 and 2013, even though the results appear to be lackluster.
One industry official who advocated for the write-off confided to The Fiscal Times, “It would have been worse without it, sure, but it didn’t have that much effect on decisions to invest, since the economic uncertainty still had business owners extremely worried about future sales.”
None of this should be a shocker. The president’s former budget director had previously documented that past attempts at bonus depreciation were underwhelming. But desperate times called for desperate measures, and it’s only now that the full costs of the tax break are becoming known.
The Government Accountability Office revealed this month that companies saved $76.1 billion on their 2011 tab with the IRS. But it’s unclear how crucial it has been to a slow recovery.
The White House forecast back in 2010 that the 100 percent depreciation would produce $50 billion in new private investment. It would come at a $150 billion price tag for two years, but the additional corporate spending and return to normal growth patterns would bring that expense down to $30 billion over a decade, the administration said in a white paper.
What complicates those initial White House estimates is that a strong recovery never materialized, and the administration continued the accelerated depreciation—albeit at 50 percent—for 2012 and 2013. And the costs of the accelerated tax write-off may have backfired by robbing federal coffers of substantial revenue.
According to Steve Wamhoff, an analyst at the Citizens for Tax Justice the constant use of bonus depreciation—which President George W. Bush also relied on in 2002, 2003, 2004 and 2005—make it less likely that the government will ever fully recover the $120 billion in revenues first projected by the Obama administration.
“It’s meant to be a short-term stimulus that helps in the long-term, but since they keep extending it, it’s likely going to hurt since we’re not collecting enough in taxes,” Wamhoff said.
It’s tough to measure the direct impacts of accelerated depreciation. Dominion Resources, a Virginia-based energy company, for example, told The Wall Street Journal that it plans to save a total of $1.2 billion in income taxes between 2011 and 2013 thanks to the write-off. Clearly, they invested heavily in equipment, which could have resulted from the stimulus. That’s what the stimulus was intended to do on a large scale to help drive the economy.
In 2010, the Congressional Budget Office estimated that allowing full or partial expensing would, in the best case scenario, raise output by $1 per each dollar spent by the federal government. In the worst case scenario, the return would be just 20 cents on the dollar.
The CBO separately studied bonus depreciation in 2002 and 2003 (at 30 percent), and found that it produced “relatively modest” results. In fact, then-CBO director, Peter Orszag, called the results “somewhat disappointing.” Orszag later served as Obama’s budget director from 2009 to the middle of 2010, when the president put forth an even larger bonus depreciation as part of a stimulus package that topped $800 billion.
Currently, bonus depreciation is at 50 percent, and will be until the end of 2013. Obama’s fiscal 2014 budget does not extend the provision, but it does continue bonus depreciation for small businesses.
Of course, the president’s budget is more a framework for spending than an actual blueprint. So, there’s no telling whether the subsidy will hold on for another year, even though interest groups such as the U.S. Chamber of Commerce are hoping to preserve the tax break. During a congressional hearing earlier this month, a top Chamber official told lawmakers that it was vital to continue accelerated depreciation.
“Increasing the tax write-off for these capital investments increases the cash flow available for use in growing the businesses and creating jobs,” the Chamber said in a statement, adding that eliminating these write offs is “likely to harm economic growth.”