Lots of American companies have private jets, and the government gives them a pretty good reason to buy one: They can pay for themselves in just a few years.
The reason is that the American government pretends a jet only lasts five years, when in reality you can use it for decades. The government is pretending that other long-lived corporate investments—train cars, broadcast antennae, oil rigs and satellite tracking equipment—will also become useless far sooner than they will, five or seven years into a much longer working life. This willful blindness is an attempt to fool businesses into buying more expensive stuff, thus goosing the economy, but there’s not a lot of evidence that it actually works.
“As a result, businesses holding these assets are able to recapture the entire cost of acquiring the asset long before it’s ceased to produce value,” Dean Sonderegger, an executive at Bloomberg BNA who builds software that allows companies to track these write-offs. “Take private jets, for example, which have an IRS-specified useful life of five years, allowing firms to write off 70% of their cost within the first three years.”
The term of art here is depreciation, and it serves a useful purpose. You shouldn’t have to pay taxes on your necessary business expenses, but it doesn’t make sense to let companies deduct the entire cost of something they buy in the first year if it will last for years. So companies are allowed to deduct a percentage of the equipment’s cost over time, as its value depreciates. But when these rates were set in the 1986 tax reform, they were, for some reason—probably last-minute political horse-trading—often based on lifespans much shorter than the real ones.
Today, businesses can also add in bonus depreciation—who doesn’t love a bonus?—that was first instituted as stimulus after the recession in 2000, renewed and subsequently increased in the years that followed; it currently speeds up depreciation by 50%.
So has this game of accounting make-believe helped the economy? Not noticeably. Federal Reserve researchers have found negligible effects at most, and the Treasury Department found that many firms did not take advantage of the depreciation. “What I hear from my clients is that it’s more business driving these purchases,” Sonderegger says. “The tax tends to be the tail of the dog.” But that doesn’t stop the small percentage of trade groups who do rely on those breaks—notably, manufacturers of private jets—from lobbying aggressively to maintain them.
What’s the tail of this particular dog cost American taxpayers? Perhaps $35 billion annually, according to one Congressional Research Service estimate. That’s money that could go toward lowering corporate tax rates by 2%, or reducing the annual deficit 7%, or increasing investment in under-funded research programs or anti-poverty measures. President Barack Obama would prefer to eliminate the write-offs, but hasn’t gotten anywhere. Just last week, a Senate committee approved the renewal of a package of tax breaks that included bonus depreciation, and it is likely to become law.
“This will be the last tax extenders bill the committee takes up as long as I’m chairman,” promised Senator Ron Wyden, who just took over the tax-writing committee. But this is the 15th time the breaks, which largely benefit business, have been quietly renewed, and that’s a lot of inertia for him to fight.
Update, April 14: Sonderegger’s first quote has been clarified to better reflect that businesses recapture the cost of these assets from the combination of direct tax savings and the disparity between the asset’s accounting and real rate of depreciation.