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1 Erica York, Options for Improving the Tax Treatment of Structures 1 (2020)

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Options for Improving the Tax

Treatment of Structures


Erica York
Economist


Key   Findings


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*  Removing  tax policy barriers can help businesses and individuals invest, work,
   create jobs, and lift the economy during a post-pandemic recovery without
   requiring lawmakers to create new spending  programs. One  of the most
   cost-efficient options available to lawmakers is to improve the cost recovery
   treatment  of structures.

*  Residential structures must be depreciated over a 27.5-year-period and
   nonresidential structures over a 39-year period. Because of the time value
   of money, the delay in taking deductions for tax purposes means the real
   value of the deduction to the business is less than the original outlay, which
   increases the cost of capital and leads to a lower level of investment and
   economic  growth.

*  A neutral tax would allow an immediate deduction  for these outlays, the
   policy of full expensing. Alternatively, a policy that maintains the present
   value of deductions over time by adjusting the depreciation allowances would
   also be neutral toward investment; this policy is called neutral cost recovery.

*  One  challenge of removing the bias against new investment is that it creates
   a huge disparity between new  and existing structures. Rather than retain a
   bias against new investments by enacting policies short of full expensing,
   lawmakers  could extend neutral tax treatment to both new and existing
   structures.

*  Each  of these policies has trade-offs in terms of impact on economic growth,
   the disparity between new  and existing structures, and the cost to the
   government.


FISCAL
FACT
No. 712
May  2020

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