By extending bonus depreciation and introducing neutral cost recovery, the RSC budget would significantly improve the treatment of investment leading to increased growth, expanded employment, and higher wages.
Making expensing permanent is especially important now, when the economy is threatened with a recession and inflation remains high.
Reforming the Low-Income Housing Tax Credit (LIHTC) and providing neutral cost recovery for residential structures would tackle the problem of housing affordability in a complementary fashion.
By updating the tax code to allow developers to more fully cover their investments, construction costs will fall, which, in turn, means that federal affordable housing assistance dollars will go that much further in helping low-income tenants.
Studies have shown that accelerated depreciation helps increase wage growth. A recent report found that states that implemented accelerated depreciation in their tax codes led to a 2.5 percent increase in compensation per employee in manufacturing, relative to states that did not.
A neutral cost recovery system lowers the short-term cost of the policy to the federal government while providing nearly equivalent economic benefits. While neutral cost recovery is not a new idea, there are several policy questions lawmakers will want to consider when designing this system.
As stated by Rep. Jack Kemp in 1985, “Neutral cost recovery is designed to provide the present value of investment expensing without some of its practical problems.”
Revenue shortfalls and deficits can be addressed best by considering when to consider the deficit as the primary priority and reevaluating how revenue can be raised most efficiently through sound tax policy principles.
Other countries have shown that providing deductions in line with invested capital costs can have positive impacts both on investment and on debt bias.
When considering long-term policies for increasing long-run levels of investment and economic growth, full expensing and neutral cost recovery are better targeted than policies like a capital gains cut.