- Originally published on June 12, 2023, this analysis was updated on July 25th to include additional examples and details on itemizers.
House Republicans have proposed three new 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. bills packaged as the American Families and Jobs Act that would temporarily extend certain business provisions from the Tax Cuts and Jobs Act (TCJA)The Tax Cuts and Jobs Act in 2017 overhauled the federal tax code by reforming individual and business taxes. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by .47 trillion over 10 years before accounting for economic growth. —including 100 percent expensing for investments in equipment and research and development (R&D) through the end of 2025—create a bonus standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. for individuals through 2025, and curtail many recently enacted green energy 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. s, among other changes.
The combined House GOP tax package is roughly revenue neutral, and, though unlikely to become law, it shows that improving incentives for businesses to invest in the U.S. is a key priority for lawmakers. The American Families and Jobs Act could be improved upon by providing permanence for business investment 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. provisions and paying for it by further limiting business credits and other tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit, child tax credit, deduction for employer health-care contributions, and tax-advantaged savings plans. s.
The Build It in America Act (H.R. 3938) would temporarily cancel three business policy changes from the TCJA that took effect in 2022 or 2023 and align their new expiration with the broader expiration of the TCJA’s individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. provisions at the end of 2025. Beginning in 2022, companies faced a switch to five-year amortization of R&D expenses (15 years for foreign cited R&D) and a tighter interest deduction limitation based on earnings before interest and tax (EBIT) rather than earnings before interest, tax, 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. , and amortization (EBITDA). Beginning this year, companies also face the gradual phaseout of 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 new proposal would extend the policies through the end of 2025 and apply them retroactively as if they had never changed. Tax Foundation estimates it would reduce revenue by about $258 billion through 2025 but raise revenue thereafter, resulting in a $29 billion cost on a conventional basis (before accounting for effects on economic growth) and $11 billion on a dynamic basis (after accounting for growth) through 2033.
To raise additional revenue, the bill would cut back on the Inflation Reduction Act’s green energy credits, including repeal or modification of the clean energy production credit, the clean electricity investment credit, the previously owned clean vehicles credit, the clean vehicle credit, and the qualified commercial clean vehicle credit. In all, the Joint Committee on Taxation (JCT)The Joint Committee on Taxation (JCT) is a nonpartisan congressional committee in the United States that assists both the House and Senate with tax legislation. The JCT is chaired, on a rotation, by the Chair of the Senate Finance Committee and the Chairman of the House Ways and Means Committee. estimated the changes to green energy credits would raise $216 billion from 2023 through 2033.
The Small Business Jobs Act (H.R. 3937) would permanently lift the maximum Section 179 expensing deduction to $2.5 million (from $1.08 million in 2022) and raise the phaseout threshold from $2.7 million of property to $4.0 million.
The Small Business Jobs Act would also restore prior law reporting requirement rules for third-party network transactions (which the American Rescue Plan Act lowered but the IRS delayed implementing), increase the 1099 reporting threshold to $5,000, expand the exclusion for qualified small business stock to S corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). s, and expand the Opportunity Zones program for rural areas. The JCT estimates the cost of all the Small Business Jobs Act provisions would be about $81 billion over the budget window.
The Tax Cuts for Working Families Act (H.R. 3936) would temporarily boost the standard deduction by $2,000 for single filers, $3,000 for head of household filers, and $4,000 for joint filers through 2025. The extra amount would begin to phase out by 5 percent above $200,000 for single filers, $300,000 for head of household filers, and $400,000 for joint filers.
By increasing the value of the standard deduction, a joint filer in the 10 percent tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. would see their tax liability shrink by $400 ($4,000 multiplied by their 10 percent marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. ). A single filer in the 24 percent tax bracket would see a $478 tax benefit ($2,000 multiplied by their 24 percent marginal tax rate). A joint filer with a $440,000 income would qualify for a $2,000 bump in their standard deduction, as they are halfway through the 5 percent phaseout, giving them a $640 reduction in tax liability ($2,000 multiplied by their 32 percent marginal tax rate).
Tax Foundation estimates the bonus deduction change would reduce revenue by $94 billion on a conventional basis (similar to JCT’s estimate) and $84 billion on a dynamic basis. At least 3.4 million fewer households would itemize deductions in 2024 under the expanded bonus deduction, representing about 2.3 percent of all tax filers.
We explicitly modeled only four of the tax changes: extension of 100 percent bonus depreciation, R&D expensing, and EBITDA-based net interest deduction limitation, as well as the temporary bonus standard deduction. We incorporated scores from JCT for the items we did not explicitly model. Overall, we find the three bills would be revenue neutral from 2023 through 2033, including the retroactive portions of the business tax changes, when scored on a conventional basis.
The bulk of tax cuts would occur in 2023 through 2025, as tax revenue would fall by more than $100 billion in each of the three years. Afterwards, tax revenue would rise relative to the baseline. That increase is a function of both curtailing the green energy tax credits and shifting the timing of business deductions for investment.
|Provisions (Billions of Dollars)||2023||2024||2025||2026||2027||2028||2029||2030||2031||2032||2033||Total|
|Extension of R&D Expensing||-$91.5||-$12.6||-$4.7||$84.7||$27.9||$9.5||$0.0||$0.0||$0.0||$0.0||$0.0||$13.4|
|Extension of 100% Bonus Depreciation||-$16.2||-$41.2||-$62.0||$38.9||$23.2||$16.3||$12.5||$8.0||$4.6||$2.3||$1.3||-$12.2|
|Extension of EBITDA-Based Interest Limitation||-$16.1||-$7.4||-$6.7||$0.0||$0.0||$0.0||$0.0||$0.0||$0.0||$0.0||$0.0||-$30.2|
|Bonus Standard Deduction||$0.0||-$46.5||-$47.7||$0.0||$0.0||$0.0||$0.0||$0.0||$0.0||$0.0||$0.0||-$94.2|
|Conventional Subtotal of Scored Items||-$123.8||-$107.7||-$121.0||$123.6||$51.1||$25.9||$12.5||$8.0||$4.6||$2.3||$1.3||-$123.2|
|Dynamic Subtotal of Scored Items||-$120.7||-$97.1||-$106.6||$123.5||$51.0||$25.9||$12.5||$8.0||$4.6||$2.3||$1.3||-$95.3|
|Subtotal of Non-Scored Items from JCT, Including Repeal of Green Energy Credits, Expansion of Opportunity Zones, and Other Changes||-$1.7||-$4.1||-$5.0||$1.0||$14.1||$17.3||$16.7||$18.8||$21.3||$24.4||$20.5||$123.2|
|Source: Tax Foundation General Equilibrium Model, June 2023, and Joint Committee on Taxation.|
Because the policies are temporary, they would not result in long-run growth for the economy, wages, or jobs. But they would slightly boost growth while the more generous policies are in effect, lifting economic output by about 0.15 percent in 2024 and 2025 (followed by slight decreases in economic output starting in 2026 until economic output returns to its baseline level). As such, incorporating the economic feedback from the four provisions we modeled, we estimate the entire package would increase revenue by about $28 billion over the budget window.
While the stated intent of the expansion in the standard deduction is to provide relief from 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. , it is poorly targeted since it delays relief until next year and provides little to no benefit to low-income households. If lawmakers are trying to reduce near-term inflation, a deficit-increasing individual income tax cut is the wrong approach. While the expanded standard deduction would build on the TCJA’s efforts to reduce itemization, it would be simpler for lawmakers to directly and permanently limit unwanted deductions rather than further raise the floor on itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. s by expanding the standard deduction.
The business tax changes are designed to help improve investment incentives, because when inflation is high, allowing worsening cost recovery to take hold would sharply increase the after-tax cost of investment. Addressing R&D amortization and the phaseout of bonus depreciation, especially during a period of high inflation, is important.
Temporarily extending full bonus depreciation and R&D expensing is a step in the right direction, but businesses should have access to full, immediate expensing on a permanent basis. Full and permanent cost recovery is the most cost-effective and pro-growth tax policy change lawmakers can prioritize—it has a proven track record of success, while place-based incentives like Opportunity Zones are less promising.
Using revenue to retroactively extend the policies is inefficient—businesses cannot go back to 2022 or early 2023 and invest more. But R&D amortization in particular is creating liquidity problems for some small businesses, raising taxes on income that doesn’t exist, making retroactive relief an important element.
Ultimately, lawmakers should focus on broadly improving investment incentives and reducing uncertainty by permanently extending 100 percent bonus depreciation and R&D expensing. If made permanent, the three major business tax changes in the Build It in America Act would boost long-run economic output by 0.5 percent and hours worked by nearly 100,000 full-time equivalent jobs, driven primarily by permanent 100 percent bonus depreciation. The government would lose revenue within the 10-year budget window, but on a dynamic basis, about one-fourth of the cost would be recovered due to higher output and incomes within the budget window, and, in the long run, revenues would be slightly above baseline. Reducing credits and other tax expenditures could cover temporary deficits. Better cost recovery, especially on a permanent basis, is complementary to the Federal Reserve’s inflation reduction efforts because it encourages business investment.
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