Congress should consider changing "generous" depreciation rules for corporate capital investment, Senate Finance Committee Chairman Max Baucus said.
Tax breaks for capital investment, including accelerated depreciation, are among the most expensive targeted provisions in the tax code. That makes them a target as lawmakers consider ways to reduce the corporate tax rate without increasing the budget deficit. Companies can deduct many capital expenses for tax purposes faster than they can on their financial statements.
"As we work to make our corporate tax rate more competitive, we must carefully examine changes to our current depreciation system and strike the right balance," the Montana Democrat said today during a hearing by his committee that examined incentives for capital investment and manufacturing.
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In its framework for revising the U.S. corporate tax system, the Obama administration said Congress should consider changing depreciation rules as part of a plan to remove breaks and reduce the corporate rate from 35 percent to 28 percent.
The challenge for lawmakers, witnesses at the hearing said, is to figure out which incentives to retain in the tax code.
Baucus said he intends to pursue a tax overhaul. "It's going to be politically difficult this year, but nevertheless, we have to try," he said.
The administration has proposed keeping a lower corporate tax rate of 25 percent for manufacturers and a credit for corporate research.
"Not having any specific investment incentives would be a shame," said Ike Brannon, director of economic policy and congressional relations at the American Action Forum, a group that supports smaller government.
If anything, investment incentives should be enhanced, because of what countries such as the U.K. are doing to encourage innovation, said Robert Atkinson, president of the Information Technology and Innovation Foundation. The research group's board includes executives from companies such as Microsoft Corp. and International Business Machines Corp.
"These countries are putting in place all of these specific incentives, and I would argue we have to catch up," Atkinson said.
Baucus said he sympathizes with the argument that the tax code should be simpler. Figuring out how to do that, he said, is what's difficult.
"Where do we draw the line here?" he asked. "How much to lower rates, how much to broaden the base?"
Bloomberg News
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