Businesses like Obama tax write-off plan but want to keep Bush tax cuts too
The business community likes President Obama’s proposal to accelerate tax write-offs for companies buying equipment and other big-ticket items. But it is clamoring for more — extension of all of the soon-expiring Bush-era tax cuts.
Obama will tout the write-offs Wednesday when he unveils a $180-billion stimulus package. But he isn’t likely to back down on his stand on continuing the marginal tax rate cuts only for households and businesses earning less than $250,000, analysts said.
Economists and business trade groups see Obama’s proposal as giving a modest boost to the economy, not as having the major effect that would come from removing the uncertainty about the Bush tax cuts. Those cuts are set to expire at the end of the year, and Republicans are insisting that unless they be allowed to continue in their entirety, there would be further damage to the weak recovery.
“He’s not really addressing the big issues,” Brad Benson, president of Squires-Belt Material Co. in San Diego, said of Obama. Benson does welcome the president’s proposal on depreciation costs, which would save businesses $200 billion over two years.
“I think it’s maybe a small step in the right direction, but as a manufacturer, I’m more concerned with the tax-cut issue,” said Benson, whose company supplies drywall and other building supplies for commercial and residential construction.
Mark Zandi, chief economist of Moody’s Analytics, said Obama’s proposal would help the recovery but was not “a game changer.”
He estimated the plan would add 0.2 percentage point in 2011 to gross domestic product, the value of all goods and services produced in the country.
“I think we’re talking tens of thousands of jobs, not hundreds of thousands of jobs. It’s helpful but it’s small,” Zandi said. “Far and away the most important policy item on the agenda is what to do about the expiring tax cuts.”
Although Obama wants to limit the continuation of the tax cuts to those earning less than $250,000, the administration wants to give businesses a break on making capital purchases sooner rather than later.
In a speech in Cleveland, Obama is expected to propose allowing businesses to write off many of the capital purchases in the first year instead of depreciating the costs over several years. The new accelerated depreciation would last through 2011 in hopes it would entice businesses to make large capital purchases that would help stimulate the economy and increase jobs.
The proposal is part of a package that includes $50 billion in spending on roads, railroads and airport runways and a $100-billion expansion and extension of the expired research-and-development tax credit, which also would be made permanent rather than extended for a year or two at a time.
To help stimulate the economy in 2008 and 2009, businesses were allowed to write off 50% of many capital purchases the first year they were made. There has been bipartisan support for continuing that tax break through this year, and a provision to do that is in a $50-billion small-business-lending bill pending in the Senate.
All require congressional approval, which will be difficult in the few remaining weeks before the November midterm elections as Democrats and Republicans bitterly point fingers at each other for the nation’s economic troubles. Key Republicans, including some who have pushed for the accelerated business write-offs, slammed Obama’s plans Tuesday as falling short because they did not address the expiring Bush tax cuts.
While calling the write-off plan “a serious proposal Congress should consider,” Rep. Dave Camp (R-Mich.) questioned whether the benefit would be “outweighed” by tax increases.
Obama wants to make it more attractive for businesses to make large purchases by boosting the first-year tax write-off to cover the entire cost.
“It builds off of an effort to get capital off the sidelines and into the economy,” said White House Press Secretary Robert Gibbs. The White House said the change would benefit 1.5 million corporations and “several million individuals” who make business investments.
The change to tax law would encourage businesses to make purchases now because they can recoup the cost through tax breaks quicker. Though the move would save businesses $200 billion in the short term, it would cost the government only $30 billion in lost revenue over the next decade because those expenses would have been written off over time anyway.
“It is an effort to encourage people to buy now as opposed to take a wait-and-see approach for the next six months, 12 months, 18 months, 24 months,” said Ed Bolen, president of the National Business Aviation Assn., which represents the aviation industry and supports the write-off proposal.
Past attempts have helped boost the economy, he said. In the fourth quarter of 2009, for example, aviation manufacturers reported that 50% to 75% of their customers cited accelerated write-off schedules as a reason for their purchases.
But previous depreciation changes have shown limited economic effect. The nonpartisan Congressional Budget Office said changes from 2001 to 2005, which included a 30% first-year write-off, then a 50% one, had a “relatively modest” effect on business investments.
Christopher House, an associate economics professor at the University of Michigan, also studied the 2001-2005 changes and found that certain categories of equipment received a significant boost in sales but that overall there was a small effect on business investment.
Although Obama’s plan would double the existing first-year write-off, the effect could be lessened because of the unique nature of the recent deep recession, House said.
The real benefit of recouping investment expenses earlier is saving on borrowing costs. But with interest rates so low, “the benefits are going to be particularly muted,” House said.
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