“Businesses which claim the bonus depreciation and wind up having weak profits are allowed to carry the tax write offs forward for up to 20 years before they start paying taxes again. A banker would be fired for making this loan.”
Good morning Senator McCormick, Representative Goode, and members of the Joint Standing Committee on Taxation. I am Sarah Austin, a policy analyst at the Maine Center for Economic Policy (MECEP). MECEP works to advance public policies that help Maine people prosper in a strong, fair, and sustainable economy.
I am here to testify in opposition to Section 15 of LD 1564 “An Act To Update References to the United States Internal Revenue Code of 1986 Contained in the Maine Revised Statutes.” If passed, Section 15 of this bill would allocate $39 million in Maine taxpayer dollars over the next four years to extend the Maine Capital Investment Credit. This is not an effective use of taxpayer dollars and will not help grow Maine’s economy.
The Maine Capital Investment Credit is Maine’s version of federal bonus depreciation. Last year, congress voted to extend bonus depreciation for tax years 2016-2019 and to allow businesses to claim it retroactively for qualifying expenses made in 2015. This will deliver windfall tax breaks to businesses at the expense of state funding for education, municipal services, and other programs important to Maine.
The unproven economic theory behind bonus depreciation is that businesses will make more capital investments when they can accelerate their ability to reduce the after tax cost of these investments.[1] The fact remains that even without bonus depreciation businesses can still reduce the after tax cost of capital expenses, just over a longer time horizon. In other words, Maine businesses will still be able to depreciate capital expenses and reduce their taxes, just over a longer time period, even if you do not extend the Maine Capital Investment Credit.
The original intent of bonus depreciation was to provide an incentive for businesses to purchase new equipment during the recession. The policy allows businesses to depreciate large amounts of their capital expenses in the first year of purchase, for which they receive a windfall tax break. In later years, businesses have less of their capital expenses to depreciate on their taxes, and therefore pay taxes on more of their profits. Essentially, bonus depreciation is an interest free loan that is repaid in later years through corporate income taxes.
Frontloading a benefit that profitable businesses historically claimed over a longer time horizon puts taxpayer money at even greater risk. There is no requirement that the business show its capacity to recoup its investment through increased profits. There is no claw back provision that requires businesses to pay back the loan if the business goes under or fails to increase profits after adding capital through this program. Businesses that claim the bonus depreciation and wind up having weak profits are allowed to carry the tax write offs forward for up to 20 years before they start paying taxes again. A banker would be fired for making this loan.
If we were generating a list of how best to allocate $39 million to help grow Maine’s economy, bonus depreciation would not be on that list. It has a poor return on investment, especially when considered next to other policy alternatives. At best, a dollar spent on tax windfalls from bonus depreciation will return a dollar in economic benefit. At worst, this policy returns 20 cents in economic benefit for every dollar it spends.[2] To put this in perspective, for every dollar we spend on transportation infrastructure we can expect to generate $2 in economic activity.[3] For every dollar we spend on early childhood education we can expect to generate $8.60 in economic activity.[4]
I noted early that bonus depreciation was intended as an incentive. LD 1564 would commit $11.5 million to actions that have already happened in the past. That’s not an incentive, that’s a windfall. Responsible Maine businesses are making business decisions based on their assessment of the market and the potential for future profitability, not on whether or not such windfalls will be granted at some time in the future after they’ve already made a business decision.
Perhaps in recognition of this, thirty-one states, including every other state in New England, do not conform to federal bonus depreciation.[5] This is an important point to bear in mind. Maine has a choice regarding how we conform to or decouple from certain federal laws. We are not legally bound to conform in this case and should not feel pressure to do so.
Finally, unlike the federal government, Maine does not have the luxury of growing the debt in order to pay for the continuation of bonus depreciation. If this bill is passed, Maine must provide the funds in real time. That means either cutting existing programs and commitments already approved by the legislature or opting to allocate surplus or rainy day funds to this program. Doing the latter would be fiscally irresponsible. We should not pay for these kinds of programs with one-time money or through stop-gap measures. The former would thwart investments in more pressing priorities. Rather than deliver windfall profits to businesses that do not need them, we should focus our efforts on investing in the things they will need over time – an educated and highly skilled workforce, safe communities, reliable transportation and broadband access, and thriving communities in which to live and do business.
[1] Gary Guenther, April 9, 2014. Section 179 and Bonus Depreciation Expensing Allowances: Current Law, Legislative Proposals in the 113th Congress, and Economic Effects, Congressional Research Service. Available at: http://digital.library.unt.edu/ark:/67531/metadc287899/m1/1/high_res_d/RL31852_2014Apr09.pdf
[2] Gary Guenther, April 9, 2014. Section 179 and Bonus Depreciation Expensing Allowances: Current Law, Legislative Proposals in the 113th Congress, and Economic Effects, Congressional Research Service. Available at: http://digital.library.unt.edu/ark:/67531/metadc287899/m1/1/high_res_d/RL31852_2014Apr09.pdf
[3] Sylvian Ludec and Daniel Wilson, November 26, 2012. Highway Grants: Roads to Prosperity? Federal Reserve Bank of San Francisco. Available at: http://www.frbsf.org/economic-research/publications/economic-letter/2012/november/highway-grants/
[4] Executive Office of the President of the United States, December 10, 2014. The Economics of Early Childhood Investments. Available at: https://www.whitehouse.gov/sites/default/files/docs/early_childhood_report1.pdf
[5] Melissa Fernley, March 17, 2015. State Conformity with Federal Bonus Depreciation Rules, Bloomberg BNA. Available at: https://www.bnasoftware.com/resources/articles/state-conformity-with-federal-depreciation-rules
