Statement on Small Business Expensing Provisions
Statement by U.S. Chamber Vice President and Chief Economist Martin Regalia before the House Small Business Subcommittee on Tax, Finance, and Exports on Small Business Expensing Provisions
April 3, 2003
The U.S. Chamber of Commerce appreciates this opportunity to express its views on small business expensing provisions. The U.S. Chamber is the world's largest business federation, representing more than three million businesses and organizations of every size, sector and region. This breadth of membership places the Chamber in a unique position to speak for the business community.
The Economic Environment
Recently released data show the U.S. economy to be one that is still searching for confidence, balance, and momentum. While real economic growth has been positive over the five quarters ending last December, growth has been erratic and has averaged only 2.9% — below the economy's potential and insufficient to create new jobs. In fact, over that same time period, the economy has lost about 1.3 million jobs. An important issue will be whether Congress can pass effective economic stimulus and growth legislation, such as the President's Jobs and Growth Plan.
Although some recent monthly data show enough incipient signs of improvement to keep the nation hopeful that the economy will accelerate in the future, policy initiatives are clearly warranted. With the Fed having cut interest rates about as far as possible, fiscal policy appears to be our only remaining choice.
The Need for Small Business Tax Reform
In recent years, the importance of small businesses to our economic growth and prosperity has been unparalleled. As economic statistics confirm, maintaining a healthy environment for small businesses to proliferate contributes greatly to our economic expansion and raising our standard of living. Small enterprises and startups form the foundation for our future economic prosperity.
Furthermore, small businesses have traditionally accounted for most of our nation's job growth. According to statistics from the Small Business Administration, small businesses represent ninety-nine percent of all employers and generate two-thirds to three-quarters of all net new jobs. It would make sense, then, that any attempt to stimulate the economy by job creation through fiscal policy should have a strong small business component.
It is sound economic policy and in the best interest of our country that small businesses be encouraged and nurtured through the promotion of tax policies that allow them the opportunity to devote more resources to their growth, rather than to the expansion of government. This can be manifested, in part, by reform of the tax code's small business capital expensing provisions.
The Case for Increasing Small Business Capital Asset Expensing
The tax implications underlying small business owners' purchasing decisions affect the timing of those decisions, as well as whether or not to proceed. Small business owners are keenly aware of the impact of the U.S. tax code on their decisions. Currently, the recovery of investment in capital expenditures by the small business sector is limited by antiquated depreciation rules and anemic allowances under Internal Revenue Code section 179.
In July 2000, the Treasury Department issued its "Report to The Congress on Depreciation Recovery Periods and Methods" in response to Congressional concerns about the appropriateness of current depreciation rules. Congress feared that the rules might measure income improperly, thereby creating competitive disadvantages and an inefficient allocation of investment capital, and requested a study to determine if improvements could be made.
Although the 132-page document presented some analysis of the issue, Treasury concluded that — in Treasury Tax Legislative Counsel Joseph Mikrut's words – "Resolution of the issue of how well the current recovery periods and methods reflect useful lives and economic depreciation rates would involve detailed empirical studies and years of analysis. The data required for this analysis would be costly and difficult to obtain. Thus, the Report does not contain legislative recommendations concerning specific recovery periods or depreciation methods." (Treasury Tax Legislative Counsel Joseph Mikrut's testimony before the House Ways and Means Subcommittee on Oversight, September 26, 2000.)
The Report, however, correctly noted that the current depreciation system is dated; is not indexed for inflation; and does not provide for updating depreciation rules to reflect new assets, new activities, and new production technologies.
Under Internal Revenue Code section 179, businesses can annually expense up to $25,000 of purchased capital assets placed into service during a tax year. This amount, however, is subject to phase-out, dollar for dollar, when the cost of qualifying property placed into service that year exceeds $200,000. While this allowance has been increased very modestly in recent years, it is not scheduled to increase any further under current law.
In general, businesses investing more than the annual expensing allowance must recover the cost of their expenditures over several years through the depreciation system. Inflation, however, erodes the present value of future depreciation deductions. The fact that section 179 contains no mechanism increasing this allowance or the phase-out levels for the effects of inflation further exacerbates this problem.
This injustice would best be remedied through the full expensing of business equipment. At the very least, amendment of section 179 to allow progressively greater expensing amounts, and enhanced phase-outs, would be warranted. Such measures would spur additional investment in business assets and lead to increased productivity, creation of more jobs, and economic growth. Moreover, it would be a component of good, long-term public policy.
Current proposals, such as the one embodied in the President's Jobs and Growth Plan, would go a long way toward enabling and enticing the nation's small businesses to increase their investments in productivity-enhancing business property. The President's section 179 expensing proposal would both triple the maximum deduction and introduce enhanced phase-out levels, stemming the erosion in the value of depreciation deductions that would otherwise occur over time. This, in turn, would further augment current cash flow and encourage and enable these companies to invest in new machinery and equipment, increasing their productivity and providing a further boost to the economic sectors that produce and service those items. In sum, these funds would be used to grow businesses, boosting the nation's economic growth and creating new jobs.
At various times, disagreements have arisen over how much small business asset expensing should be increased. However, the U.S. Chamber recognizes that most members of both major political parties support reform of section 179 and augmented expensing, and are ready to do something about it.
Many realize that liberalization of the expensing provisions would, in many cases, be the swing factor that would provide the impetus for small businesses to go out there and make that new, additional capital investment. All that remains is to decide on the parameters of reform, craft the legislative language, and enact it.
It's time to iron out those details and get it done.