10.16.2015Public Policy

Bonus Depreciation: a tax policy that drives investment and economic growth

Ask any student of an Econ 101 class and they’ll tell you: Investment drives economic growth. Whether its investment in physical, financial, or human capital, investment - the practice of putting some of today’s resources towards growing tomorrow’s gains - is fundamental to growth in the modern economy. Unfortunately, the ability of U.S. businesses to free up capital for investing in equipment or jobs is being further hamstrung by Congress’ inability to approve extension of a little-known tax policy called “bonus depreciation.”

Bonus Depreciation is a tax policy that encourages large and small U.S. businesses to invest in the U.S. economy by purchasing equipment today – everything from communications hardware like routers and fiber to farming or restaurant equipment – they might otherwise put off or not buy at all. This is accomplished by allowing businesses to write off immediately one half of the cost of the equipment. The business would normally take the deduction over several years. The tax bill is paid in full but deferred, allowing the business to free up capital in the short term to buy more equipment, make new hires, and generally create additional economic activity, which in turn creates additional tax revenues, increased productivity, higher wages and greater employment.

The latest iteration of bonus depreciation expired last December. It should at least be renewed, if not made permanent. A number of studies over the past 15 years have observed the impact that bonus depreciation has had on economic growth trends. The Institute for Policy Innovation in 2001 estimated that every $1 of accelerated depreciation generates about $9 of GDP growth. Another study, by University of Chicago and Harvard found that between 2001 and 2004 bonus depreciation raised business investment an average of over 17 percent and between 2008 and 2010 (primarily 50% expensing) by almost 30 percent. Another 2008 study estimated that between 2002 and 2003 bonus depreciation policies increased GDP by $10 billion to $20 billion, and contributed to the creation or retention of 100,000 to 200,000 jobs.

More recently, the Progressive Policy Institute noted that over the past decade the United States has suffered what it termed an “investment drought,” which had led to a downturn in productivity. In other words, U.S. workers don’t have the buildings, equipment, or software to better do their jobs.

Another byproduct of business investment is the job growth that follows. Over the past six decades there is a strong correlation between jobs and business investment.

Companies like Verizon invest billions each year in equipment and infrastructure. Our investments in technology and communications in particular, help America stay competitive in today’s global economy: equipment to deploy and expand broadband and mobile networks, to build out more efficient manufacturing processes through the Internet of Things, or building out smart tools for transport or energy efficiency. An interruption to bonus depreciation would undoubtedly alter American businesses’ investment decisions, jeopardizing our leadership in global commerce.

With policymakers looking for solutions to energize an economy that has been languishing, renewing bonus depreciation should be an easy one. It’s a proven tactic for jumpstarting growth, and it doesn’t require gimmicks, loopholes or short-changing the Treasury. That’s why we recently joined over 200 other companies in signing a letter by the National Association of Manufacturers that calls on Congress to move swiftly on policies that would help encourage investment. Bonus depreciation is a critical component of that strategy, and we remain committed to working with Congress and other policymakers to implement policies to jumpstart economic growth.