Ask 1,000 random people what the 2017 tax reform law did, and probably none of them would tell you about full expensing of business investments—instead, they’d likely cite individual or corporate income tax reductions.
Not only was this system of asset depreciation a compliance nightmare, it also reduced the value of the tax deduction for businesses. Businesses value cash on hand more than cash down the road, as cash on hand can be used for other productive purposes now rather than later.
In recognition of this, the TCJA sought to transition to full expensing for capital investments, allowing businesses to bypass the system of asset depreciation entirely. Instead, they could immediately deduct the full value of capital investments the year they were made.
There was a catch, though—unfortunately, full expensing has the bad luck of looking costly under a 10-year budget window. The budget impact of all legislative proposals are “scored” by official government budget scorekeepers over a 10-year period, and this is generally the window at which Congress considers the impact that legislation will have on the budget.
As a result, the expensing provision was scheduled to expire in 2022 in order to make the 10-year budget math fit with Congress’s complicated budget reconciliation rules. This included research and development costs, which had been subject to expensing since the 1950s.
The thing is, full expensing reduces federal tax revenue by next to nothing in practice. Businesses receive the same tax benefit over the long run—the sole difference is whether they receive it simply over one year, or in a complicated manner over as many as 50y.
In order to comply with budget reconciliation limitations on budget impact, Congress chose to phase out full expensing between 2023 and 2027, hoping to extend it later before that happened. Full expensing of R&D costs were scheduled to end in 2022. That made full expensing’s “price tag” on the final TCJA a far more manageable $86.3 billion.
That helped with making the TCJA’s budget math work, but reverting to asset depreciation makes no sense at all from a policy perspective. It’s more complicated, it reduces the incentive for businesses to invest (which is crucial to raising wages), and it increases federal revenue only in the short term.
The impact is even more severe for R&D investments, which businesses have been able to fully expense for decades, even prior to the passage of the TCJA. Allowing R&D investments to be subjected to the system of asset depreciation would not just be undoing a good policy fix (like with other capital investments), it would subject this kind of investment to an inferior system for essentially the first time.