(The Center Square) – The economic freefall wrought by the coronavirus pandemic includes sparking a bear market on Wall Street as well as suppressing new car sales.
According to a letter sent to Congressional leaders by John Bozzella, president and CEO of the Allliance for Automotive Innovation (AAI), and Bill Long, president and CEO of the Motor and Equipment Manufacturers Association (MEMA), new cars sale projections for March are 41 percent below the same month last year. The percentage is attributed to research conducted by J.D. Powers and Associates.
Dated March 20, the letter proposes several policy recommendations for Congressional consideration.
“[W]e join other business organizations, like the U.S. Chamber of Commerce, individual companies, and several of our nation’s Governors in supporting proposals such as the creation of credit facilities to provide loans and loan guarantees to employers with more than 500 employees experiencing loss of revenue due to COVID-19,” the letter states.
“We would strongly encourage policymakers at all levels of Government to examine both this and other proposals, to ensure critical financial resources and loan programs remain available for businesses that are impacted by the public health emergency, including small businesses with less than 500 employees,” the letter continued.
Other proposals include:
- Delay or defer 2020 quarterly federal tax payments;
- Institute a temporary Employer Payroll Tax holiday
- Delay the June 1st date of entry into the United States, Mexico and Canada trade agreement; and
- Expand and extend expensing credits for equipment and machinery.
The last item, commonly called “full expensing,” was included in the Tax Cuts and Jobs Act (TCJA) of 2017, but is scheduled to sunset in 2022.
According to a report by Washington-based The Tax Foundation, full expensing allowed by the TCJA “significantly improved the ability of businesses to recover the costs of their investments by enacting 100 percent bonus depreciation for assets with cost recovery periods of 20 years or less.”
Allowing these deductions to expire, according to The Tax Foundation, does little to encourage long-term economic growth.
“[I]f Congress doesn’t make the provision permanent, it would result in an increase in the cost of investing in machinery and equipment in the United States,” the report said.
According to The Tax Foundation, the absence of full expensing results in “less capital formation, lower productivity and wages, and less output” because of waiting “years or decades to claim the cost of machines, equipment, or factories on [investors’] tax returns.”
John Mozena, president of the Center for Government Accountability, supports the AAI and MEMA full-expensing proposal as good not only for the automotive industry but as well as other Michigan businesses.
“Taking advantage of changes in the federal tax code to keep Michigan’s business taxes as competitive as possible should be a no-brainer for a state that claims to want to be a top destination for manufacturing businesses,” Mozena told The Center Square.
“In surveys of business site selectors, broad corporate tax conditions are regularly in the top five factors that businesses look at when deciding where to locate,” Mozena continued. “These kinds of tax issues actually rank higher in what makes a business choose one state over another than the special one-off tax incentive deals that Michigan’s politicians love so much.”
John Grether, professor of economics and law as a faculty member in the Kettering University School of Management, told The Center Square he doesn’t consider full expensing a magic bullet for Michigan businesses.
On one hand, he said full expensing “will decrease corporate tax liability in expenditure year but increase tax liability in the future, since there will be no depreciation allowance on capital purchases already expensed,” he said.
On the other hand, Grether noted: “If a capital expenditure puts a company into a loss, the carry forward rules will allow that loss to be used against profits in future years.”
As long as firms are investing to meet real demand over time, the change should not affect long-term corporate income tax receipts, Grether continued. “However, there is now an incentive for profit-earning firms to invest in capital ahead of demand because 1) it’s less expensive to build today than tomorrow, and 2) there is a direct tax benefit from doing so.”
The immediate short run effect would be to stimulate capital investment and employment in basic materials, construction, machine tools and automation segments of the economy, Grether said. However, he warned: “This could also lead to overinvestment and an accelerated and potentially price-increasing demand for capital goods.”
In the longer run, Grether said, when the demand for capital goods production declines, the economy would adjust back to where it should have been but for the accelerated capital spending, risking a recession.
“For better or worse, the old tax law forced firms to be judicious in their capital spending choices because they could not immediately write them off,” Grether said. “With the new rule, there will be a greater need for businesses to explain the assumptions behind their investment decisions in order for the financial markets to truly understand those investment decisions in terms of their future contribution to firm value.”