How Improving the Tax Code’s Treatment of Structures Could Help Aid America’s Economic Recovery

The COVID-19 (coronavirus) pandemic has plunged America into its second recession in the last 15 years. While most of the lockdowns imposed by states and municipalities were necessary to protect public health, they also did significant economic damage to businesses and business owners across the country. Congress has a duty to help these businesses get on the road to economic recovery, just as it has a duty to assist the workers and families most severely impacted by the pandemic and recession.

One of the most effective ways Congress can help the recovery is to allow businesses to reduce their tax obligations by the full cost of the investments they make, in the year that they make those investments. This is called “full and immediate expensing,” and NTU has long supported the following policy changes:

  • Extend the full and immediate expensing provisions of the Tax Cuts and Jobs Act (TCJA) beyond 2022. The TCJA allowed businesses to fully and immediately expense their investments in short-lived assets, such as machinery and equipment. However, this provision of the TCJA begins phasing down in 2023, once again reducing the costs that businesses can recover from these investments. NTU has endorsed the Accelerate Long-Term Investment Growth Now (ALIGN) Act, from Sen. Pat Toomey (R-PA) and Rep. Jodey Arrington (R-TX), which would make permanent the full and immediate expensing provisions of the TCJA.
  • Expand full and immediate expensing to structures. As our friends at the Tax Foundation point out, “when a business purchases a structure, it has to deduct the cost over a period of up to 27.5 years (for residential buildings) or 39 years (for nonresidential buildings).” This greatly reduces the value of investments in structures, due to inflation and the time value of money. NTU supports allowing businesses to fully and immediately deduct the value of their investments in structures in the year they make the investment. Rep. Chip Roy (R-TX) recently introduced a bill that would treat non-residential structure investments made by medical supply and pharmaceutical companies as 20-year property, instead of 39-year property, which would effectively allow these companies to fully and immediately expense those investments. Some critics of full and immediate expensing point out (correctly) that expanding this treatment to structures would result in significant lost revenue for the federal government. Tax Foundation has a thoughtful alternative addressing those concerns, called neutral cost recovery (NCR; more on that below).
  • Reverse the TCJA treatment of research and development (R&D) expenses. One counterproductive provision of TCJA was its change to the tax treatment of R&D expenses. Under current law, businesses can fully and immediately expense R&D costs. Due to TCJA, though, starting in 2022 businesses need to spread those costs out over five years. NTU supports efforts to repeal this provision of TCJA, ensuring that businesses can continue to fully and immediately expense R&D costs beyond 2021.

These provisions, especially if combined, would have a significant, positive impact on the U.S. economy. Modeling conducted by the Tax Foundation suggests that full and immediate expensing for short-lived assets, structures, and R&D would increase gross domestic product (GDP) by 5.1 percent, increase wages by 4.3 percent, and create over one million jobs. Full and immediate expensing lowers the cost for businesses to make investments, which not only boosts the productivity of their current workforce but also frees up capital for businesses to make more investments in the future.

Full and immediate expensing would also lead to significant amounts of lost revenue for the federal government, around $809 billion over 10 years under dynamic scoring in the Tax Foundation’s model. Policymakers might pause at such a score, given Congress has already appropriated around $3 trillion to blunt the public health and economic impacts of COVID-19. While some of these objections are surely rooted in bad-faith opposition to any full and immediate expensing proposal, some objections will likely be grounded in good-faith concern about further additions to America’s record-breaking debt and deficits.

This is why Congress should give careful consideration to an alternative championed by the Tax Foundation: a neutral cost recovery system (NCRS). Under NCRS, businesses would still deduct the costs of structures over 27.5 or 39 years. However, the value of the deduction would be adjusted from year to year to account for inflation and the time value of money. Therefore, total deductions over the life of the asset would equal the first-year value of the investment. As Tax Foundation points out in one of their reports, a hypothetical $500 investment would lead to a full $500 recovery, rather than a $463 recovery under current depreciation schedules.

NCRS would also alleviate some deficit impact concerns. Tax Foundation estimates that, on a dynamic basis, pairing extension of full expensing for short-lived assets with NCRS for structures would only lead to $386 billion in lost revenue over 10 years (under dynamic scoring). This is less than half the cost of full and immediate expensing for short-lived assets, structures, and R&D costs.

While NTU continues to prefer full and immediate expensing for all three categories outlined above, we believe NCRS for structures could be a point of potential compromise for members of Congress concerned about expensing’s deficit impact. NCRS is a pro-growth policy that would be a significant improvement over the current-law treatment of these important investments.