Details and Analysis of the Tax Relief for American Families and Workers Act of 2024

The House Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. has advanced a tax deal to the House floor that would temporarily—and retroactively—restore two major business deductions for cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. and expand the child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. through 2025, among other changes. The deal, titled TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Relief for American Families and Workers Act of 2024, is paid for by clamping down on fraudulent payments of a COVID-era tax credit.

While the package is far from ideal, it represents a step in the right direction by taking a fiscally responsible approach to improving cost recovery. Most importantly, it addresses a major competitive disadvantage in our current treatment of research and development (R&D), returning to the international norm of allowing companies to fully and immediately deduct R&D expenses, including salaries for scientists and researchers. Similarly, it allows companies to fully and immediately deduct investment in equipment and other short-lived assets. However, it only extends these provisions temporarily through 2025, creating uncertainty for taxpayers and dampening the policies’ otherwise strong pro-growth incentives.

The Tax Relief for American Families and Workers Act of 2024 contains the following major provisions:

Temporary R&D Expensing

The bill would temporarily restore full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for domestic R&D. Since the start of 2022, companies have been required to spread deductions for investments in domestic R&D out over five years (15 years for foreign-sited R&D). This policy is known as R&D amortization and was put in place by the 2017 Tax Cuts and Jobs Act (TCJA). The tax deal would return to R&D expensing for R&D occurring within the United States, applying retroactively for the 2022 and 2023 tax years and continuing until the end of 2025.

Temporary Full Expensing for Short-Lived Assets (100 Percent Bonus DepreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. )

The bill would temporarily restore 100 percent bonus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. for equipment and other short-lived capital assets. The TCJA allowed companies to fully deduct the cost of short-lived investments immediately, from the fourth quarter of 2017 until the end of 2022, after which it started to phase out by 20 percentage points per year: in 2023, companies were able to deduct 80 percent of their short-lived investment costs immediately; this year, companies will be able to deduct 60 percent immediately; and so on. The bill would restore 100 percent bonus depreciation retroactively for investments made since the end of 2022 and maintain 100 percent bonus depreciation until the end of 2025.

Temporary Child Tax Credit Expansions

For tax years 2024 and 2025, the bill would adjust the maximum child tax credit for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. , lifting it from $2,000 to $2,100 in both years. Currently for 2023, if the child tax credit exceeds a taxpayer’s tax liability, they may receive up to $1,600 of the credit as a refund based on an earned income formula calculated as 15 percent of earned income above $2,500.

The proposal would increase the $1,600 limit on refundability to $1,800 for tax year 2023, $1,900 in 2024, and $2,000 in 2025, as well as apply an inflation adjustment in 2025 that would make the cap match the credit maximum of $2,100. It would also quicken the phase-in for taxpayers with multiple children and allow taxpayers an election to use their prior-year earned income to calculate their maximum child tax credit. After the end of 2025, all four changes to the credit would expire.

In addition to the two major cost recovery changes and the child tax credit expansion, the bill would:

• Restore a less restrictive limitation on business deductions for net interest expense, returning to a 30 percent limit based on EBITDA (earnings before interest, taxes, depreciation, and amortization) rather than EBIT (earnings before interest and taxes); the tighter limitation based on EBIT took effect beginning in 2022, and the proposal would allow companies an election to use the looser limitation for 2022 and 2023 and require the EBITDA-based limitation for 2024 and 2025
• Increase the amount of low-income housing tax credit (LIHTC) available to states by 12.5 percent and lower the bond-financing threshold for the credit from 50 percent to 30 percent from 2023 through 2025
• Expand Section 179 expensing by increasing the maximum deduction from $1.16 million to $1.29 million and increasing the phaseout threshold from $2.89 million to $3.22 million for tax years beginning after 2023, with these levels indexed for inflation thereafter
• Provide relief from double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. for residents of Taiwan, consistent with standard bilateral treaties the U.S. has with many countries
• Provide tax relief for losses and other situations related to qualified disaster areas or events
• Gradually increase certain information reporting requirement thresholds from $600 to $1,000, adjusted for inflation after 2024

To pay for the tax cuts over the 10-year budget window, the bill would tighten enforcement efforts and make other changes to the COVID-era employee retention tax credit (ERTC), which under current law may be claimed on amended returns through April 15, 2025. It would apply penalties to “ERTC promoters” who have failed to comply with requirements for preparing ERTC claims, increase the statute of limitations on assessments of the ERTC, and disallow claims of the ERTC after January 31, 2024.

Economic, Revenue, and Distributional Effects of the Tax Relief for American Families and Workers Act of 2024

We modeled the economic, revenue, and distributional effects of the changes to R&D expensing, bonus depreciation, the net interest limitation, and the child tax credit (excluding the CTC lookback provision). For revenue scores of the remaining provisions, we relied on estimates from the Joint Committee on Taxation (JCT). We reflect the 2022 and 2023 changes in the revenue and distributional results for 2024 to best match when the government and taxpayers would see changes in revenue and income.

Because the changes to R&D expensing, bonus depreciation, the net interest limitation, and the child tax credit are temporary, they do not have a lasting impact on investment or work decisions by businesses or individuals. As such, we find the policies would have no impact on the long-run economy, including economic output, the capital stock, wages, or employment. In the following section, we discuss the economic impact of the provisions if they were made permanent.

Table 1. Long-Run Economic Effects of the Tax Relief for American Families and Workers Act of 2024

Source: Tax Foundation General Equilibrium Model, January 2024.

We estimate on a conventional basis the tax deal would be roughly revenue neutral, raising about $40 million from 2024 through 2033. The revenue losses from retroactively changing bonus depreciation, R&D expensing, the interest limitation, and the child tax credit amount to $110 billion and are reflected in 2024 in the table below because that is when tax revenues would change.

As mentioned, because the major policies expire after 2025, they do not have a long-run economic impact. While in effect, however, better cost recovery for R&D and machinery investment would boost investment incentives. On a dynamic basis, accounting for the temporary increase in the capital stock within the budget window, we estimate the tax deal would raise federal revenue by $6 billion from 2024 through 2033. The small magnitude of revenue feedback reflects how temporary tax policy fails to boost long-run economic growth.

Table 2. Revenue Effects of the Four Major Provisions of the Tax Relief for American Families and Workers Act (Billions of Dollars)

Note: Taxpayers may elect to use either EBIT or EBITDA in 2022 and 2023. "Revenue Scored by JCT" adjusts the Joint Committee on Taxation's conventional revenue estimates to be on a calendar year basis consistent with our modeled estimates.

Source: Tax Foundation General Equilibrium Model, January 2024

Our distributional results reflect only the changes to R&D expensing, 100 percent bonus depreciation, the net interest limitation, and the child tax credit expansions excluding the lookback provision. In 2024, taxpayers would benefit from the retroactive changes for tax years 2022 and 2023 and from the changes for 2024, together resulting in a 0.9 percent increase in after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. . The bottom quintile would see the largest increase in after-tax income of 4.8 percent, while the top 1 percent would see a 2.1 percent increase.

The distributional results for 2025 reflect only the changes that apply in that year. On average, taxpayers would see after-tax incomes rise by 0.4 percent. The bottom quintile would see a 2.4 percent increase while the top quintile would see a 0.5 percent increase.

Because the provisions expire by the end of the budget window, taxpayers would see negligible changes in their after-tax incomes in 2033 that only reflect the slight lingering effects of changing the timing of business deductions. In the long run, because the major provisions expire and have no lasting economic benefit, after-tax incomes would not change on a static or dynamic basis.

Table 3. Distribution Effects of the Four Major Provisions of the Tax Relief for American Families and Workers Act (Percent Change in After-Tax Income)

Note: Distributional effects include the changes to R&D, bonus depreciation, the net interest limitation, and the child tax credit excluding the lookback period.

Source: Tax Foundation General Equilibrium Model, January 2024.

Temporary Tax Policy Leaves Economic Benefits on the Table

Providing R&D expensing and 100 percent bonus depreciation are consistent with sound tax policy principles, simplifying the treatment of business costs and removing the tax penalties for business investment. Expensing only provides a tax cut for companies that invest, providing a powerful and broad-based incentive generating substantial economic growth.

This difference is why expensing is a more cost-effective growth incentive than reducing the corporate tax rate: expensing only cuts taxes on the returns to new capital, while a lower corporate tax rate cuts taxes on the returns to new capital and old capital. It has more bang for the buck.

But economic gains are only to be had if companies can expect expensing to be available permanently, as companies make investment decisions on long time horizons and the economy adjusts to prices and incentives that can be expected to exist in the long run. The temporary extensions of R&D expensing and bonus depreciation through 2025 may shift investment plans forward (something we do not include in our modeling) but leave long-run incentives unchanged. Only to the extent taxpayers expect the policies to be extended beyond 2025 will they have any lasting economic effects.

A substantial portion (about $110 billion) of the revenue cost is applied retroactively, mainly serving as a windfall to taxpayers. Providing tax relief for investments already made in 2022 and 2023 creates no incentive for future investment (outside of how it may shape expectations about future policy developments). However, in the case of R&D amortization, there is evidence that it is creating liquidity problems for some small businesses and raising taxes on income that doesn’t exist, which provides some justification for retroactive relief.

The instability of these policies creates uncertainty for taxpayers, which dampens incentives. Ideally, both R&D expensing and bonus depreciation would be made permanent. By extending the policies through 2025, lawmakers are aligning the cost recovery expirations with broader expirations of the TCJA’s individual tax cuts, likely in the hopes of including permanence for cost recovery in an inevitable 2025 tax deal. Tax Foundation estimates permanence for both provisions would reduce federal revenue by about $600 billion over the 10-year budget window and increase GDP by about 0.5 percent.

The proposed expansion of the child tax credit is much narrower than the 2021 expansion that some lawmakers have wanted to bring back. That expansion significantly increased the maximum credit and removed the phase-in, severing the credit’s tie to work and offsetting tax liability. While the amount of credit people can receive above their tax liability would increase, the proposed design generally preserves the credit’s work incentives. In some cases, the design strengthens them by phasing the credit in faster.

Scholars at the American Enterprise Institute have argued that the option to use the previous year’s income to qualify for the credit could reduce work incentives as it means a person could receive the credit in a year they do not work. In our assessment, a major labor supply effect from a one-year lookback period is unlikely, especially because this is a temporary rule that adds further complexity to an already extremely complex credit, dampening any marginal incentive effect. Rather, the magnitude of that effect across the entire workforce is likely to be small, as any given taxpayer can only use their previous year’s income once, and over the long run, most workers would not cycle in and out of the workforce from year to year to game a small tax credit.

Finally, the tax deal’s cost is offset by tightening enforcement around a COVID-era credit that has become extremely costly. The employee retention tax credit was designed to provide temporary relief to employers during the pandemic. It has since been plagued with fraudulent claims resulting in fiscal costs exceeding the original estimate.

Capping the cost of the ERTC program, even at this late stage, is a fully warranted and sound policy, particularly at a time of $2 trillion deficits. Using the revenue to pay for much-needed improvements to cost recovery is a good trade if Congress and the IRS are mindful to not penalize businesses who played by the rules.

Lastly, addressing the issue of inflation, because the package is revenue neutral over the budget window, it is not likely to have any substantial effect on inflation. To the extent the policies are extended beyond 2025 by some later legislation, at that time it would be wise for lawmakers to once again seek to offset any fiscal cost with legitimate and sound payfors.

The tax deal has many positive aspects that would move the tax code in the right direction, most notably the restoration of expensing for R&D and business equipment investment for the next two years. The proposed pay for to offset the costs of the package is also a promising sign of fiscal responsibility. The most unfortunate aspect of the deal, however, is that temporary and retroactive changes forgo the economic gains that could be had from a permanent and stable policy that rightfully treats business investment as the key driver of economic growth.

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