SEP 06 President Barack Obama, in one of his most dramatic gestures to business, will propose that companies be allowed to write off 100% of their new investment in plant and equipment through 2011, a plan that White House economists say would cut business taxes by nearly $200 billion over two years.
The proposal, to be laid out Wednesday in a speech in Cleveland, tops a raft of announcements, from a proposed expansion of the research and experimentation tax credit to $50 billion in additional spending on roads, railways and runways. But unlike those two ideas, both familiar from Mr. Obama's 2008 campaign, the investment incentive would embrace a long-held wish by conservative economists that had never won support from either Republican or Democratic administrations.
"Temporary investment incentives like this can have big effects because they really pull investment forward," said R. Glenn Hubbard, dean of the Columbia University School of Business and a former chairman of the Council of Economic Advisers under President George W. Bush. "This could have a big stimulative effect."
But the response Monday from business lobbyists hinted at uncertain political prospects for the idea: Many said a higher priority for their members remains extension of the Bush income-tax rates for higher earners that are set to expire at the end of 2010. Mr. Obama and many congressional Democrats want to let those breaks expire.
Administration officials hope businesses spooked by the faltering recovery but with investments already on the drawing board will rush to take advantage of the tax break. The tax would be retroactive to Sept. 8, the day it is announced, so businesses won't delay planned investments while waiting for congressional action.
Congress must approve the proposal, and White House Chief of Staff Rahm Emanuel said Monday the White House hasn't yet discussed legislative strategy. The House and Senate return from recess the week of Sept. 13 with a separate, small-business lending measure as their first priority.
Lawmakers plan to leave Washington again after only a few weeks in session to campaign ahead of the hotly contested midterm elections Nov. 2, so any action on the new proposal may have to wait until a lame-duck session after Election Day, or early next year.
Mr. Obama will follow his economic address Wednesday with a full White House press conference on Friday. Obama Vows to Help 'Great American Middle Class' Economists Grapple Over Job Creation "Without a doubt with this series, the president has seized the economic initiative," Mr. Emanuel said. Officials said that all but $30 billion of the cost to the Treasury of the tax break should be recouped over the next decade because businesses wouldn't be able to deduct the cost of the investments over time, as they do now.
Under the proposal, businesses would be able to lower their taxable income for 2011 by the full amount of new investments they make in plant, equipment and virtually any investment besides real estate, an administration official said.
Under current law, if a company spends $10 million on a new factory, it gets to deduct the full amount of the cost over a period of between three and 20 years, depending on the investment. So it cuts its stated pre-tax profits by a varying amount each year, thus reducing taxes until the cost of the investment has been written off. Under the new proposal, the company would get to deduct the full $10 million in the first year.
A senior administration official said about 1.5 million companies—those with tax liabilities and investments in the works—are expected to take advantage of the proposal. Kevin Hassett, an economist at the conservative American Enterprise Institute, praised the Obama plan, saying it "goes to show they've learned their lesson" from the 2009 stimulus. He estimated the tax change would expand business equipment investment by 5% to 10%.
The business investment deduction would supplement other Obama proposals, notably a permanent extension of an expanded research and experimentation tax credit. Since his presidential campaign, Mr. Obama has been pushing for a permanent research and experimentation credit, to replace the short-term extensions that have passed Congress 13 times since the credit was created in 1981. Beyond the certainty a permanent credit gives business, Mr. Obama wants to make the R&E credit more attractive by simplifying it from its complicated, two-tier structure, and expanding it by about 20%, a proposal that would cost about $100 billion over 10 years. The White House says it will pay for that expansion by closing other business tax loopholes.
At a Labor Day union rally in Milwaukee Monday, Mr. Obama also proposed another round of infrastructure investments to supplement the billions of dollars already being spent from the 2009 stimulus act. Administration officials say the up front, $50 billion boost in spending would pay for 150,000 miles of refurbished roads, 4,000 miles of high-speed rail and 150 miles of airport runway, along with advances in air-traffic control technology.
Mr. Emanuel said the three proposals together would move money quickly into the economy through the government and the private sector. He said he spoke last week with Paul S. Otellini, chief executive officer of Intel Corp. "He said, 'You give us certainty. We can start investing,'" Mr. Emanuel recounted. An Intel spokesman confirmed the conversation.
But some in the business community said a higher priority for them remained the extension of the Bush-era income-tax rates for higher earners, set to expire at the end of 2010. Mr. Obama and many congressional Democrats want to eliminate the current 33% and 35% rates for higher earners, and return them to pre-Bush levels of 36% and 39.6%.
"The best thing to do is to get rid of uncertainty, and that includes the cliff we're falling off with all these [tax] provisions that are expiring," said Bill Rys, tax counsel for the National Federation of Independent Business, a small-business group. "Our members have been asking to extend those tax rates…I think small business would be most benefited by knowing that their taxes aren't going up next year."
Many NFIB members also are concerned about a new requirement for reporting purchases of more than $600 to the Internal Revenue Service, he added. He questioned whether many business owners would choose to buy more equipment, at least until sales pick up. "If this will be offered as a tradeoff for raising the top two rates, it's a non-starter," said Jade West, senior vice president of the National Association of Wholesaler-Distributors.
"We like expensing, and hope this is something we could get behind, but the devil is in the details," she added. "That said, I am delighted to see the administration move toward policies that acknowledge that tax policy has consequences." Jay Timmons, executive vice president of the National Association of Manufacturers, described the expensing proposal as "good at face value." But he questioned the administration's logic in proposing to raise some business taxes in order to lower others. "The good news [is that] the administration recognizes that manufacturing is key to getting the economy back on track and ensuring we are able to sustain economic growth and job creation. But you can't do that if you're penalizing one sector of manufacturing while trying to incent another."
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