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Recently, Senator Jeff Bingaman (D-NM) and Senator Charles Grassley (R-IA) introduced bills that would discourage private investment in toll roads through public-private partnerships (so-called P3s). Notable examples of this type of investment include the long-term concessions for the Chicago Skyway and the Indiana Toll Road that were granted to private toll road operator-investors.
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:
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The Transportation Access for All Americans Act (S. 885) would curtail tax benefits for "applicable leased highway property" by extending the depreciation period from 15 years to 45 years. In addition, the amortization period for intangibles (such as goodwill or franchise rights) would be increased from 15 years to the entire term of the lease. These provisions would dramatically lower the after-tax returns on investment relative to other types of road, such as logging roads or private rights of way, and similar investment activity. The bill also would deny private activity bond financing to any projects. A companion bill, the Transportation Equity for All Americans Act (S. 844), would create significant disincentives for States to enter into private investment arrangements by curbing the use of federal highway funds for these roads. 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.
