Now is the time for Congress to start looking ahead to the economic recovery. Current aid efforts should remain targeted and temporary, but the opposite characteristics—permanence and universality—should guide pro-growth policies that can enable a robust American recovery.
Topping the list of policies to help enable our return to economic boom times is permanent, full expensing of new investments and extending similar treatment to factories and retail space.
To do just that, Sens. Ted Cruz, R-Texas, and Martha McSally, R-Ariz., have introduced the CREATE JOBS Act (Cost Recovery and Expensing Acceleration to Transform the Economy and Jumpstart Opportunities for Businesses and Startups).
Full expensing lets businesses deduct spending on new investments, such as equipment and tools, in the same way they currently can deduct spending on employee wages, advertising costs, or rent.
Expensing makes investing in American workers less expensive so that we can be more productive and earn higher wages.
Under current law, short-lived assets (those with useful lives of 20 years or less) are eligible for full expensing through 2022, and then it phases out over the following five years. A year earlier, new spending on research and development will also lose the benefit of expensing.
New buildings, such as rental housing and manufacturing floor space, are not currently eligible for the benefits of expensing.
The CREATE JOBS Act fixes those problems by making existing expensing permanent and allowing longer-lived investments the ability to use a “neutral cost-recovery system,” which provides a similar economic benefit as expensing.
If businesses retain an expanded and permanent ability to deduct the full cost of their investments, they will choose to invest more as the after-tax cost of investing decreases.
The Tax Foundation estimates that the proposal would “grow the long-run economy by 4.0 percent [and] expand the capital stock by 10.1 percent.”
As companies invest and innovate, they use better technology and increase productivity, all of which boosts wages and jobs. The CREATE JOBS Act is estimated to “lift wages by 3.4 percent, and create more than 800,000 new full-time equivalent jobs.”
In the post-coronavirus recovery, American businesses will need to retool their operations for an economy that will look different in many ways.
Many firms will need to expand, and others will need to reorganize. Entrepreneurs will start new businesses, and existing companies will want to bring critical capabilities back to the United States.
Those new investments will be larger and come sooner if Congress makes existing expensing permanent and allows neutral cost recovery for buildings.
If Congress does nothing, the recovery will be threatened by the expiring expensing policies that will arbitrarily increase business costs and make American workers less productive.
The economic recovery will respond first to Americans’ ability and willingness to return to work. Good economic policy, such as full expensing, will be the crucial second step to sustain the coming recovery.