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Obama Administration Releases Report Outlining Benefits of Expensing Proposal in Encouraging Business Expansion, Hiring Now

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The White House

Office of the Press Secretary

For Immediate Release
October 29, 2010

Obama Administration Releases Report Outlining Benefits of Expensing Proposal in Encouraging Business Expansion, Hiring Now

WASHINGTON, DC – Today, President Obama will visit a business in Beltsville, Maryland where he will make remarks on the economy and discuss a new report issued today by the Department of the Treasury that details how the President’s proposal to allow businesses and investors to deduct immediately the full cost of most investments will help businesses expand and hire.

The report is attached and a full executive summary is below.

The report shows that the President’s proposal will:

  • Accelerate $150 billion in tax cuts to 2 million businesses: 100 percent expensing will accelerate $150 billion in tax cuts to 2 million businesses – providing $200 billion in relief over the next two years when combined with small business expensing and bonus depreciation provisions the President signed into law last month.
  • Lower the average cost of capital for business investment by more than 75 percent: Through temporary 100 percent expensing, Treasury estimates that businesses’ average cost of capital on new investments will fall from 7.18 percent to 1.68 percent – providing an incentive to pursue a broader range of investments through the end of 2011.
  • Produce about $50 billion in new investment: Studies of similar tax cuts in the past have found they encouraged businesses to increase targeted investments. Based on the results of one such study, Treasury estimates 100 percent expensing could support $50 billion in new investment, while other outside estimates have projected an even larger impact.

Today, the President will visit Stromberg Sheet Metal, a medium sized business in Beltsville, Maryland.  Under the President’s proposal, a business like Stromberg would be able to take advantage of this proposal to invest in new equipment this year or next year and deduct 100 percent of that investment immediately.  For example, if a business bought an additional $1 million worth of equipment next year, they would be able to deduct the full $1 million up front, potentially accelerating hundreds of thousands of dollars in tax cuts.  That’s real money that businesses like Stromberg could use to expand or hire new workers right now, and provides a strong incentive to increase investment now, creating even more jobs.

The full executive summary of the report is below:

The Case for Temporary 100 Percent Expensing: Encouraging Business to Expand Now By Lowering the Cost of Investment

100 percent expensing of qualified capital – also known as 100 percent bonus depreciation – through 2011 would:

  • Accelerate $150 billion in tax cuts to 2 million businesses: 100 percent expensing will accelerate $150 billion in tax cuts to 2 million businesses – providing $200 billion in relief over the next two years when combined with small business expensing and bonus depreciation provisions the President signed into law last month.
  • Lower the average cost of capital for business investment by more than 75 percent: Through temporary 100 percent expensing, Treasury estimates that businesses’ average cost of capital on new investments will fall from 7.18 percent to 1.68 percent – providing an incentive to pursue a broader range of investments through the end of 2011.
  • Produce about $50 billion in new investment: Studies of similar tax cuts in the past have found they encouraged businesses to increase targeted investments.  Based on the results of one such study, Treasury estimates 100 percent expensing could support $50 billion in new investment, while other outside estimates have projected an even larger impact.

Since Day One, The President Has Enacted Targeted Tax Cuts To Encourage Private-Sector Investment: Since taking office, the President has signed into law a number of tax cuts that provide incentives for private sector investment – including 16 tax cuts targeted at small businesses. For example:

  • The Recovery Act and Expansion of Net Operating Loss (NOL) Carryback Advanced $109 Billion in Business Tax Cuts in 2009 and 2010: The American Recovery and Reinvestment Act (Recovery Act) included major tax cuts for businesses, including 50 percent bonus depreciation, which allowed for an immediate deduction of half the cost of certain investments. Along with the additional expansion of the NOL carryback period that the President signed last November, these actions advanced more than $109 billion of business tax cuts in 2009 and 2010.
  • The Small Business Jobs Act Accelerated $55 Billion in Tax Relief Through the Next Year: On September 27, President Obama signed the Small Business Jobs Act, which extends the Recovery Act provision for 50 percent bonus depreciation through 2010 and increases the amount of investments that small businesses can immediately expense through 2011. In total, the bill accelerates $55 billion of tax relief through next year.

100 Percent Expensing Is the Next Step to Get Business Investment Off the Sidelines: The President’s proposal allows businesses to deduct immediately the full cost of qualified capital investments made between September 8, 2010 – when the proposal was announced – and the end of 2011. Full expensing will:

  • Accelerate An Additional $150 Billion in Tax Relief Over the Next Two Years: 100 percent expensing would put an additional $150 billion in tax relief in the hands of businesses over the next two years – for a total of $200 billion in relief when combined with expensing provisions in the Small Business Jobs Act.
  • Provides Tax Cuts to 2 Million Businesses: The President’s proposal is expected to provide tax cuts to 2 million businesses, small and large.
  • Recover Much of the Cost Over Time: The President’s proposal allows businesses to receive deductions up front that they would otherwise receive over several years – encouraging investment now, while also allowing much of the reduced revenues to be recouped in future years. In total, the net cost of the proposal is expected to be less than $30 billion over ten years.

100 Percent Expensing Lowers Businesses’ Cost of Capital by an Average of Over 75 Percent: Implementing temporary 100 percent expensing of capital investments will:

  • Lower the Average Cost of Capital for Business Investment: Treasury analysis finds that temporary 100 percent expensing reduces the average cost of capital across all business investment from 7.18 percent to 1.68 percent. This reflects a reduction in the rate of return a business must expect – before taxes – for it to choose to invest, thus expanding the range of investments it would be willing to make by the end of 2011.

Example of How 100 Percent Expensing Provides an Incentive to Invest: Consider a business that makes $1 million of additional investments in new equipment that typically have a 7-year recovery period. Under current law, the business would only be able to deduct a fraction of its investment each year – about $143,000 in the first year, for example. At a tax rate of 35 percent, that would reduce the business’ taxes in the first year by $50,000. By contrast, under immediate 100 percent expensing, the business could deduct all $1 million in the first year – reducing the business’ taxes by $350,000.

Not only does this provide the business with more cash on hand this year – money that can be used to expand and hire new workers – but because businesses value cash today more than cash in the future, immediate expensing also makes the investment more attractive. For example, using a “discount” rate of 6 percent, the value of deducting $1 million in the first year might be worth the full $350,000 for the business – but the value of deducting it over the entire 7-year recovery period would only be about $303,000, reflecting the added incentive the business receives with immediate expensing. The incentive only grows more powerful as the recovery period grows longer, and for long-lived investments that are made based on expectations of demand over a number of years, tax incentives to invest now can have particularly strong effects on investment timing.

100 Percent Expensing Builds Off the Demonstrated Effectiveness of Past Expensing Programs: Evidence from past, less substantial changes in bonus depreciation shows that expensing can have “a powerful effect on the composition of investment” while in effect. For example:

  • Previous Research on More Modest Bonus Depreciation Policies Found A Significant Impact on Investment. One recent study found that the 2002 and 2003 bonus depreciation policies – which provided a smaller incentive for investment than the President’s proposal – had “noticeable effects on the economy,” with “capital that benefited substantially from the policy” seeing “sharp increases in investment.” An estimate applying the results of that study to today’s economy and taking account of the President’s more generous proposal suggests that 100 percent expensing would increase investment by roughly $50 billion next year, while other outside estimates have projected an even larger impact.
  • 100 Percent Expensing Increases the Impact on Investment and Growth Compared to Past Provisions: By providing for 100 percent expensing through the end of 2011, the President’s proposal expands the incentives for new investment compared to partial bonus depreciation, increasing its likely effectiveness compared to past proposals.
  • Expensing Disproportionately Helps Industries Especially Hard-Hit by the Recession: The President’s proposal would spur investments at a time when spending on equipment and software has not yet recovered compared to pre-recession levels.