Full Expensing and Meaningful Tax Reform

By Sutton Truluck, Research Assistant, Heritage Action for America.

The Trump presidential campaign and congressional Republicans made numerous promises to Americans throughout the 2016 election cycle. Second only to repealing Obamacare, the most recurring promise was to deliver pro-growth tax reform by the end of this year.

Unfortunately—now nine months into the Trump presidency and over one year since House Republican leadership released its “Better Way” tax reform blueprint—we have yet to see an actual legislative text. A vague White House press release attempted to explain that a small group of administration officials and members of congress, the so-called “Big Six” have “for three months… been meeting regularly to develop a shared template for tax reform.”

Fortunately—although only three months remain in 2017—there is still time for course corrections led by conservatives. Deadlines have become clearer as Republicans coalesce around using the budget reconciliation process to pass tax reform in fiscal year 2018—which begins October 1st.

Next week the “Big Six” is releasing a “consensus document” with the core elements of their tax reform proposal. Early claims of “consensus” can be harmless affirmations at the outset of the legislative process. However—as evidenced by the breakdown of Obamacare repeal efforts—consensus should be founded in incremental policy deliberations with conservative input, not a last minute “take it or leave it” approach.

Consensus can also be fleeting—as we are starting to find out with “expensing” policies on tax reform. The Heritage Foundation and Heritage Action support and have prioritized “full” and immediate expensing which allows all businesses to deduct the full cost of capital investments from their taxable income right away. Full expensing can also be thought of as tax-free entrepreneurship. (Read Heritage Action’s policy brief on tax reform and expensing here).

If included in a larger tax reform bill, full expensing could replace the current system of depreciation—a convoluted multi-year accounting system controlled by the federal government. In short, full and immediate expensing would make it cheaper and easier for startup companies and Main Street businesses to grow and expand their companies. This means economic growth, more jobs, and higher wages for Americans across the country.

The House “Better Way” blueprint from last year agrees with Heritage’s position on expensing. However, according to recent media reports some members have since called the policy into question—stating that Republicans should now pursue “accelerated” expensing of capital investments rather than full expensing. Other administration officials have suggested support for “unprecedented” expensing.

Heritage explains why this recent shift may have occurred:

“Recent tax reform discussions have cited the $2 trillion static revenue loss from full expensing as a reason to leave expensing out of reform packages. Much of the revenue loss from expensing is front-loaded in the first years of the program as new investments are made and old capital continues to be written off.”

Heritage continues:

“When economic growth is taken into account, the true cost shrinks to about $800 billion over 10 years. The static cost continues to decrease throughout a 20-year window. There are numerous ways to offset the cost of tax reform in a fiscally responsible way, but Congress should not let artificial constraints like revenue-neutrality keep important reforms from being enacted.”

As mentioned above, Republicans intend to use a powerful tool called budget reconciliation to pass tax reform. A prominent feature of reconciliation is that it allows passage of tax legislation in the Senate by a simple majority vote rather than the three fifths majority typically required by Senate rules—this allows 50 Senate Republicans to bypass Democrats altogether.

While this path allows fast-track reforms, it is not without drawbacks. Specifically to the expensing debate, reconciliation prohibits consideration of legislation that increases the federal deficit outside of the budget window—usually a period of 10 years. The budget for tax reform has not been agreed to thus far and some have called for extending the benchmark 10 year budget window. As Heritage noted, the static cost of full expensing actually decreases over a 20 year window.

Ultimately, full expensing should remain a crucial part of tax reform and be considered alongside rate reductions. As Heritage summarized:

“To help the economy realize its growth potential, any tax reform plan must include both expensing and a lower corporate tax rate. Congress should make expensing its first priority and then permanently lower the corporate tax rate as low as possible, or ideally repeal the tax altogether.” (emphasis added)

Heritage Action will continue to fight for conservative tax reform that lowers corporate rates and allows for full expensing or tax-free entrepreneurship. Together, these two reforms can spur economic growth, create jobs, and increase wages for Americans.

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