Putting aside the merits of P3 deals, the proposals by Senators Bingaman and Grassley represent a disturbing trend of Congress micro-managing the cost recovery system. Increasingly, lawmakers are using depreciation schedules to reward activities they like and punish those they don’t. This sort of tinkering adds complexity to the code and drags the cost recovery system further away from any connection to economic useful life—which, after all, was supposed to be the point.
Under current law, taxpayers may take depreciation deductions for new investments under the modified accelerated cost recovery system (MACRS). Each asset is assigned a recovery period (the number of years over which depreciation allowances are spread), a recovery method (how depreciation allowances are allocated over the recovery period), and a convention to determine when the asset was placed in service. The recovery period is based upon the class life of the property as originally established by the IRS in 1962. Remarkably, recovery periods have remained largely unchanged since 1986 and most class lives date back to 1962 or earlier.
In 1988, Congress revoked the IRS’s authority to assign class lives. Since then, entire new technologies have been created, such as mobile phones, automated manufacturing systems, and laser printers. Based in part on concerns that the depreciation system was in need of reform, Congress directed Treasury to study the system in 2000. The report concluded that the system was dated and included an evaluation of options for either overhauling or modifying the system. Instead moving ahead with reform or even restoring IRS authority to update class life assignments, Congress has instead chosen to micro-manage the system. Here are just a few examples:
• extending the recovery period of single-purpose agricultural and horticultural structures from 7-year to 10-year property
• changing depreciation of property used in certain farming businesses to the 150% declining balance method
• changing the classification of fruit and nut-bearing trees and vines to 10-year property
• increasing the lives of municipal sewers from 20-years to 25-years
• adding motorsports entertainment complexes and Alaska natural gas pipelines as seven-year property
• cutting the depreciation period for smart electric meters and smart electric grid equipment from 20 years to 10
The new focus on legislating individual cost recovery periods results in class lives with ambiguous meaning and leads to administrative problems and taxpayer controversies. Congressional meddling increases economic distortions and moves us further from a system that rationally adds new assets and updates existing categories of investments. These problems will multiply if the trend continues. President Bush’s tax reform panel proposed overhauling and simplifying the current depreciation system. Let’s hope the Volker panel will look at depreciation reform as well. Cost recovery isn’t very sexy, but no tax reform effort should ignore it.
The new focus on legislating individual cost recovery periods results in class lives with ambiguous meaning and leads to administrative problems and taxpayer controversies. Congressional meddling increases economic distortions and moves us further from a system that rationally adds new assets and updates existing categories of investments. These problems will multiply if the trend continues. President Bush’s tax reform panel proposed overhauling and simplifying the current depreciation system. Let’s hope the Volker panel will look at depreciation reform as well. Cost recovery isn’t very sexy, but no tax reform effort should ignore it.
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Comments
Re: From Nascar to Nuts: Why Congress Needs to Stop Micro-Managing Cost Recovery
by
Michael Bindner
on Mon 11 May 2009 12:15 PM EDT | Permanent Link
I am of two minds on this. You are correct that this system needs to be rationalized and this would likely be a good thing.
On the other hand, the power of the Executive Branch to make any determination in this area is a product of delegation from the Legislative Branch. The result may not be very pretty, but it is the system we have.
Earmarks aren't very pretty either, but if they are fully debated some would call them preferable to the alternative - which is decision making which may be made by political appointees whose qualification for office may be donor or campaign worker. While there is a chance that the decision-maker may be a careerist or an expert panel, this is not gauranteed. Either system may be corrupt or cronyist, it depends on the visibility provided.
On the other hand, the power of the Executive Branch to make any determination in this area is a product of delegation from the Legislative Branch. The result may not be very pretty, but it is the system we have.
Earmarks aren't very pretty either, but if they are fully debated some would call them preferable to the alternative - which is decision making which may be made by political appointees whose qualification for office may be donor or campaign worker. While there is a chance that the decision-maker may be a careerist or an expert panel, this is not gauranteed. Either system may be corrupt or cronyist, it depends on the visibility provided.
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