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Time to Let “Bonus Depreciation” Expire Permanently

January 13, 2014 at 10:39 AM

One of the first steps by policymakers to stimulate the economy during the Great Recession was to allow businesses to take bigger tax deductions for certain new investments.  Since enacting this temporary provision — often called “bonus depreciation” — in 2008, they have regularly extended it (albeit at a less generous rate since 2012).

Bonus depreciation expired at the end of last year.  It’s time to let it stay that way.

Policymakers also enacted bonus depreciation in 2002 when the economy was weak after the 2001 recession and extended it through 2004 — but they then let it expire.  Studies show that it hasn’t been a particularly cost-effective way to stimulate the economy.

“Three studies (two from 2006 and the other from 2007) provide additional support for the view that temporary accelerated depreciation is largely ineffective as a policy tool for economic stimulus,” the Congressional Research Service (CRS) concluded in a 2013 summary of the research.  CRS cited a Federal Reserve finding that “no more than 10% of companies deemed the [bonus depreciation] allowances an important consideration in determining the timing or level of qualifying investments.”

Similarly, analyses by the Congressional Budget Office and Moody’s have shown that bonus depreciation has a fairly low bang for the buck.  Estimates from Mark Zandi suggest that every $1 of tax revenue lost from bonus depreciation generates just 20 cents in economic activity.  By contrast, Zandi shows that $1 spent on infrastructure would generate about $1.40 in economic activity, and that extending emergency unemployment benefits would boost the economy by about $1.50 for every dollar spent.

And bonus depreciation is costly, particularly if policymakers make it permanent.  While a one-year extension would cost about $5 billion, the ten-year cost of a permanent extension would be about $280 billion.

Our point is not that the economy no longer needs help to spur growth and job creation, but rather that bonus depreciation isn’t an efficient way to do it and the time has come to let this temporary tax break end.  Congress should allow bonus depreciation to expire and channel these budget resources into more effective policies.