Perhaps the greatest policy challenge confronting this Congress remains how, exactly, to fulfill leading lawmakers’ promises to systemically reform the income tax law. Even after receiving months of input (informed by years of experience) from industry representatives, legislators, advocacy groups like NTU, and everyday taxpaying citizens, Members of the House’s and Senate’s tax-writing committees still have considerable work to do in crafting a tax reform package for floor consideration. No one said it would be easy.
As these efforts continue, having the right kind of legislative raw material will be vital to building a tax structure that will stand up to political and economic vicissitudes. Last week Senator Jeff Flake (R-AZ) made a helpful contribution toward one element of this vital construction project – the tax treatment of business expenses – by introducing the Small Business Investment Promotion Act (S. 1342). The bill is cosponsored by Sens. Jim Inhofe (R-OK) and Tom Udall (D-NM).
Aside from considerations such as the rate and ease of filing returns, business owners must – to a greater degree than the majority of individual tax filers – consider how expenses will affect their tax bills. Start-up companies may have large initial outlays for their infrastructure, while more mature firms may need to retool to keep up with more modern competitors. Either way, the ability to write off major investments up-front could make the difference in a business’ future growth, or even its survival.
How would a streamlined, less burdensome tax system recognize this imperative? Under one of the best alternatives, the Fair Tax (H.R. 25/S. 122), expensing for federal tax purposes would be irrelevant. Businesses would no longer be afflicted with income and payroll tax headaches from Washington, and would instead collect a consumption tax if they engaged in retail trade. Otherwise, in a flat or multi-rate profit tax environment, the law should allow 100 percent expensing in the year it occurs, the relief should be available to all businesses, and the provision should be as permanent as statutes permit (i.e., not put on a specific expiration schedule). Senator Flake’s bill makes good strides toward these ends:
- Small businesses could deduct as much as $250,000 of purchases up to $800,000 in a given year on equipment, software, and other critical expenses. Under current law, those levels will fall next year to just $25,000 and $200,000, respectively – sending a terrible signal during a still-fragile economic recovery.
- These amounts would be adjusted yearly for inflation.
- The entire provision would be a part of permanent law.
There are of course many meritorious options for addressing the issue of business taxes in general and expensing in particular. For example, Senators Susan Collins (R-ME) and Robert Casey (D-PA) have authored bipartisan legislation (S. 1085) to make the present expensing policy permanent, plus extend for one year the Tax Code’s allowance for bonus depreciation as well as the 15-year straight-line depreciation for certain improvements. These would be positive changes too.
As NTU noted upon introduction of Senator Flake’s bill:
NTU strongly supports tax-policy proposals that permanently expand, simplify, and accelerate expensing for all businesses. Senator Flake's legislation makes admirable progress in applying these principles to small businesses and would, properly timed, be consistent with the framework for tax reform under development in the Ways and Means and Finance Committees. Congress should act to provide business owners with greater certainty and consistency in the tax laws so they can better focus their time and energy on growing the economy.
Here’s hoping Congress can take the preceding sentence to heart and can reach agreement on a reform package that moves our tax system in the right direction.