Adopt a Neutral Cost Recovery System for All Structures

Under current law, when a business invests in a building, it is not recognized as an expense on a business’s tax return in the same year. Instead, the business deducts a share of its cost each year over multiple decades: 39 years for commercial structures and 27.5 years for residential structures. Due to inflation and the time value of money, the present value of the deductions is worth less than the original investment cost. The only exception is manufacturing structures, which are eligible for immediate expensing until the end of 2028.

This option makes all structures eligible for a neutral cost recovery system. Businesses would still take deductions over asset lives but get to adjust those deductions for both inflation and a real rate of return to preserve the real value of deductions over time. By eliminating the tax penalty from long depreciation schedules, this option would lower the cost of capital and increase incentives to invest.

On a conventional basis, this option would increase the primary deficit by $2.2 billion over the budget window. Outside the budget window, the costs would grow as the neutral cost recovery adjustments compound. While its revenue effects are backloaded, economically, neutral cost recovery has similar effects as full expensing. Both long-run GDP and long-run GNP would rise by 1.5 percent. On a dynamic basis, the primary deficit would decrease by $964.6 billion from 2027 through 2036, $966.8 billion more than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 163.8 percent by 2056.

On average, taxpayers would see small increases in their after-tax incomes in 2036, as the conventional revenue change of the adjustments is small within the budget window. On a long-run dynamic basis, taxpayers would see a 1.5 percent increase on average.