The House Ways and Means Committee on May 18 held its first hearing this congressional session on efforts to reform the U.S. tax code that could boost economic growth. Below are some of the key takeaways from committee members and the panelists.
Full Expensing Would Do the Most to Encourage Business Investment
During his opening remarks, Chairman Kevin Brady (R-Texas) pointed out that while lowering corporate 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. rates can help encourage economic growth, allowing for 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. of business investments could provide greater benefits.
“In addition to lowering rates, we also know that bold policies such as full and immediate expensing are incredibly pro-growth for jobs, for paychecks, and for our economy as a whole,” Brady said.
The Tax Foundation’s analysis has shown that full expensing can generate more growth than a corporate tax rate cut that costs the same amount of revenue.
Several panelists focused on bonus depreciation, a policy enacted in recent years that has moved the tax code closer to full expensing. One panelist stated that their business “invested more under bonus depreciation that we would have otherwise done,” implying that moving all the way to full expensing would provide an even greater incentive for business investment.
Tax Reform Must be Permanent to Truly Benefit the Economy
Lawmakers can pass tax legislation with a simple majority in the Senate under the budget reconciliation process. However, those rules require that the legislation not add to the budget deficit beyond the budget window; otherwise, the provisions would expire, as we saw with the Bush tax cuts of 2001 and 2003. The business tax code could greatly benefit from comprehensive tax reform, but a temporary tax cut would do little to spur growth.
Rep. Peter Roskam (R-Ill.) asked the panelists the importance of permanence in a tax reform package. All agreed that tax reform needs to be permanent to ensure certainty and predictability and better encourage economic growth.
“If you do a short-term, one-time [reform] … you have a surge of capital, and then it dies,” one panelist said. Another added, “Permanence creates certainty; certainty reduces risk.”
Tax Reform Requires Trade-offs
To make tax reform permanent under these budget rules, policymakers will need to consider various base-broadening provisions that can offset revenue losses from rate reductions and full expensing. On the corporate tax side, this might mean eliminating the interest deduction and enacting a border adjustment.
As one panelist mentioned, businesses benefit from the interest deduction and might oppose getting rid of that tax break as a stand-alone, but stakeholders will need to look at any tax reform package in its entirety to truly judge its benefits. Limiting interest deductibility “may be necessary as part of a broader solution,” he concluded.
In addition, tax reform represents an opportunity to not only lower the tax burden, but also raise revenue more efficiently. Revenue-neutral tax reform can, in fact, be pro-growth. The next Ways and Means hearing on May 23 will delve deeper into these issues.
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