Legislative update: Macroeconomic estimate of permanent “bonus depreciation” bill

JCT report

The Joint Committee on Taxation (JCT) issued a report—JCX-134-15 (October 27, 2015)—describing the macroeconomic effects of H.R. 2510, “Bonus Depreciation Modified and Made Permanent,” as ordered reported by the House Committee on Ways and Means on September 17, 2015.

Related content

H.R. 2510 would make “bonus depreciation” permanent and would modify certain rules applicable to qualified leasehold improvements, passenger automobiles, and long-term contracts. The bill also would make permanent and modify the election to increase the alternative minimum tax (AMT) credit in lieu of bonus depreciation; would provide rules for certain partnerships with a single corporate partner; and would provide special rules for fruit- and nut-bearing plants.

Documents

JCT estimate

The JCT report includes a table showing that, without taking into account macroeconomic effects, H.R. 2510 is estimated to decrease revenues to the federal government by approximately $280.7 billion over the 10-year budget period.  However, the table also shows that the bill is estimated to result in approximately $13.7 billion of additional revenues over that period due to the bill’s positive macroeconomic effects.  Thus, taking into account the macroeconomic impact, the JCT estimates that the bill would, on a net basis, decrease revenues by approximately $267 billion over the 10-year budget period.

The JCT used its Macroeconomic Equilibrium Growth (MEG) model to simulate the macroeconomic effects of the bill.  

JCT analysis

The JCT report indicates that:

  • Growth generated by an increase in the stock of capital resulting from the bill is projected to reduce the revenue loss from the bill by about $30.7 billion over the 10-year budget period.  However, an increase in interest rates generated by the increase in federal debt resulting from the bill is expected to increase the cost of federal debt service by about $17 billion over that same period.   Thus, the overall budgetary effects of changes in economic growth are projected to reduce the deficit by $13.7 billion over the 10-year budget period.
  • In the second and third decades after enactment, the bill is expected to result in an increase in federal debt which is expected to make private borrowing more expensive, reduce investment incentives, and reduce the rate of increase in capital stock, GDP, and associated revenues relative to those effects within the first decade.   However, the extent to which this could lead to the macroeconomic effects of the bill reducing revenues relative to the “conventional” estimate is too uncertain to allow the sign of the macroeconomic feedback effects in future decades to be predicted.

KPMG observation

The JCT previously issued a report of the macroeconomic effects of S. 1946, the “Tax Relief Extension Act of 2015,” as approved by the Senate Finance Committee on July 21, 2015.  That bill would extend retroactively the package of over 50 tax provisions that expired at the end of 2014, for two years—generally from January 1, 2015, through December 31, 2016. Thus, that bill included a temporary, retroactive extension of bonus depreciation.

The JCT report on the macroeconomic effects of S. 1946 included an overall estimate of the macroeconomic impact of extending the package of expired provisions. It did not provide a macroeconomic estimate of the impact of extending each particular expired provision.  However, the analysis in the report indicated, as a general matter, that the provisions affecting business—especially the extension of bonus depreciation—were expected to have a significant, but temporary, impact on the after-tax cost of capital.

Read an August 2015 description of the JCT’s macroeconomic estimate of S. 1946—TaxNewsFlash-United States

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