Hidden ‘bonus’ write-offs hide the true cost of tax breaks  

With major provisions of President Trump's Tax Cuts and Jobs Act of 2017 set to expire this year, there’s increased attention to how much it would cost to extend key portions of the act and how the government will pay for it.

There will no doubt be meaningful policy debates about how to reduce or offset the cost of any tax package in the new year. But a handful of policymakers are already advancing budget-scoring gimmicks to make potential policies appear less costly than they actually are, setting off a wonky budget-scoring “baseline” debate in Washington.

Decisions around which baseline to use in a budget score is a far from subtle way to influence the final price tag of legislation. But policymakers regularly use less obvious policy design tricks to achieve the same objective.

This will likely be the case again in 2025, but watch for one issue in particular: bonus depreciation schedules that hide the true cost of the tax breaks. 

At a basic level, businesses pay taxes on the difference between revenues and costs — net income. But it’s not always clear how to define “costs” or what their tax treatment should be. For expenses like wages or rent, there’s little ambiguity and the tax code allows for their immediate and total deduction. But what about when a company buys a new piece of manufacturing equipment or a new fleet of trucks, which it will use (and perhaps even pay off) over many years? Should a company be allowed to deduct the entire expense in the year of purchase, or should it be made to deduct the cost bit by bit over the years as the life of the asset depreciates?

The tax code generally allows firms to deduct a specific portion of such capital investments each year for a set number of years — something called a depreciation schedule.   

These deductions are set by policymakers who may change the level and duration of the depreciation schedule to achieve different policy objectives, such as providing stimulus to firms amid a recession or incentivizing greater investment in a specific type of capital (for example, pollution control facilities).  

Beyond standard depreciation schedules, Congress has also regularly implemented depreciation policies that temporarily allow companies to deduct a greater portion of capital costs in the first year of their investment than is typically allowed under normal depreciation schedules. This policy is commonly referred to as a “bonus depreciation."

Crucially, these “bonus” depreciation policies increase costs to the government in the near term. Firms can temporarily take a greater deduction early on in the life of their asset — meaning that the government is trading revenue now (when it is more valuable) for revenue later.

The timing of such policies and their near-term costs are the crux of a budget-scoring gimmick to which lawmakers can fall prey. Indeed, this is exactly what happened when the Tax Cuts and Jobs Act passed.

The 2017 tax cuts passed as part of reconciliation and were limited by a maximum deficit increase of $1.5 trillion. Lawmakers adopted a temporary bonus depreciation policy, allowing firms to immediately deduct 100 percent of their capital investments from 2018 to 2022 with the bonus deduction phasing out until it reaches zero in 2027.

Temporary versions of bonus depreciation schedules, such as the one in Tax Cuts and Jobs Act, appear to be low-cost, since revenues are higher in future years as firms can no longer take a larger deduction and end up paying more in taxes.

But what happens when a temporary policy on paper becomes permanent in practice? When it comes to temporary bonus depreciation policies, the answer is complicated by how the timing of bonus phase-outs interacts with traditional budget windows. As it turns out, a supposedly temporary bonus depreciation policy ends up being a particularly egregious and hard-to-spot budget gimmick.

A new report and analysis by the Budget Lab at Yale, where I am director of policy analysis, highlights this very dynamic, illustrating how the timing of various bonus deductions schedules affects government revenues and plays out in a conventional budget score.  

Take, for example, a 100 percent bonus depreciation from 2025 to 2029 followed by a phase-down until 2034. Under this temporary design, the policy would cost the government $213 billion in forgone revenue.

But what if Congress in practice makes this bonus deduction permanent over that 10-year period by extending it at a later date? This isn’t at all unlikely, given that since 2002 there has constantly been a bonus depreciation schedule in place (except for a short three-year period between 2005 and 2007).  

Under a permanent 100 percent depreciation policy, the budget score over the 10-year window would actually increase from $213 billion to $456 billion.

Depreciation policies can help achieve important policy objectives. However, revenue dynamics associated with changes in depreciation policy have significant implications for budget scorekeeping.

At a time when there will undoubtedly be heightened attention given to the budget score of any potential tax legislation next year, policymakers and the public should be on the lookout for these harder-to-spot policy tricks that hide the true costs of tax breaks.

Richard Prisinzano is the director of Policy Analysis at The Budget Lab at Yale University.