James T. Brett is president and chief executive of The New England Council.
In an effort to stimulate the economy by encouraging business purchasing in 2009, the American Recovery and Reinvestment Act (ARRA) extended the capital investment incentives passed as part of the 2008 Economic Stimulus Act.
Specifically, ARRA temporarily extended, through the end of 2009, tax relief that encourages businesses to make timely capital investments that will help stimulate the economy. As a result, business purchasing increased in the last two quarters of 2009 after a year-and-a-half decline, according to data from the Bureau of Economic Analysis.
Last month, Senate Finance Committee Chairman Max Baucus and Ranking Member Chuck Grassley filed Senate Bill 3513, The Bonus Depreciation Extension to Create Jobs Act, to again extend that relief through 2010. This bipartisan proposal would enable all businesses, regardless of their size or research and development capabilities, to invest in new equipment that would help them grow and thrive.
By reducing the first year’s tax bill for major capital purchases, the bonus depreciation allowance encourages companies to make capital investments, and the savings generated can be used to keep employment levels stable.
Bonus depreciation would serve a wide cross-section of industries — that’s why 41 national business organizations representing a broad spectrum of industries have voiced their support for the bill. In his State of the Union address earlier this year, President Obama urged Congress to “provide a tax incentive for all large businesses and all small businesses to invest in new plants and equipment.” Bonus depreciation extension would do just that.
Normally, businesses recover the cost of equipment and other capital investments through depreciation deductions spread evenly over several years. The bonus depreciation allowance provides a higher amount of depreciation earlier in the process. This tax incentive stimulates investments in tangible equipment and other property in the near term by enabling businesses to write off their cost more quickly. The resulting savings can in turn be used to preserve or even grow jobs.
In both 2008 and 2009, Congress temporarily allowed businesses to recover the costs of capital expenditures made during those years faster than the ordinary depreciation schedule would allow by initially deducting 50 percent — increased from 30 percent — of the cost of depreciable property acquired during those two years for use in the United States.
In the last decade alone, bonus depreciation has been used four times to stimulate the economy. The Institute for Policy Innovation, in a 2001 study, estimated that every dollar of tax relief dedicated to accelerated depreciation results in approximately $9 of GDP growth.
With the unemployment rate still hovering near 10 percent, it is sound public policy to extend bonus depreciation for another year.