As the House Budget Committee moves forward with assembling the various components of the House reconciliation package, a crucial opportunity exists to significantly enhance its economic growth potential. The current iteration of the tax package, heavily reliant on temporary policy, leaves substantial economic benefits unrealized.
The tax legislation approved by the Ways and Means Committee includes temporary extensions of key business provisions from the Tax Cuts and Jobs Act (TCJA) through the end of 2029. These temporary measures encompass:
- 100 percent bonus depreciation: Allowing businesses to immediately deduct the full cost of eligible property.
- Expensing of research and development (R&D) investment: Permitting businesses to deduct R&D expenditures in the year they are incurred.
- A more generous interest deduction limit: Easing restrictions on the amount of interest expense businesses can deduct.
- A new 100 percent bonus depreciation deduction for qualifying structures: Enabling immediate expensing for certain newly constructed or improved buildings.
While these temporary enhancements to cost recovery offer short-term economic boosts, their scheduled expiration undermines potential long-term gains.
The Power of Permanence: Doubling Long-Run GDP Growth
According to Tax Foundation analysis, making these four critical business provisions permanent, instead of temporary, would have a significantly more profound impact on the economy. Permanent implementation would increase long-run GDP by 1.0 percent, more than doubling the current package’s projected 0.6 percent long-run GDP effect.
The benefits of permanent cost recovery extend beyond GDP growth:
- Increased Capital Stock and Worker Wages: Under permanent policies, the U.S. capital stock would rise by 1.6 percent, and worker wages would increase by 0.7 percent. This contrasts sharply with the current legislation, which projects a decline in both.
- Higher American Incomes: American incomes would see a 0.9 percent increase with permanent provisions, a substantial improvement over the less than 0.05 percent GNP increase projected under the temporary framework.
- Job Creation: Permanent implementation is estimated to create 1,054,000 full-time equivalent (FTE) jobs in the long run, significantly higher than the 794,000 jobs projected with the current temporary measures.
Table 1. Long-Run Economic Effects of Ways and Means May 12 Tax Legislation with Permanent TCJA Business Provisions and Cost Recovery for Certain Structures
Fiscal Implications: A Worthwhile Investment in Growth
Making the TCJA business and structures cost recovery provisions permanent would entail an increased fiscal cost. The Tax Foundation estimates that the overall package would cost approximately $4.6 trillion on a conventional basis over 10 years, compared to the current package’s estimated cost of $4.1 trillion.
However, the dynamic cost, which accounts for economic feedback, only rises slightly from $3.3 trillion to $3.5 trillion over the same period. This is because the pro-growth revenue generated by the permanent business provisions partially offsets their added conventional cost.
Table 2. Revenue Effect of Ways and Means May 12 Tax Legislation with Permanent TCJA Business Provisions and Cost Recovery for Certain Structures, Billions of Dollars
Conclusion: Don’t Compromise on Pro-Growth Permanence
The current House tax package falls short of its full potential by relying on temporary cost recovery provisions. Permanence for these key business tax cuts would more than double the long-run economic impact, leading to significant increases in GDP, capital investment, worker wages, and job creation. While it entails a slightly higher fiscal cost, the dynamic revenue feedback generated by this enhanced growth makes it a worthwhile investment in the nation’s economic future. As lawmakers continue their deliberations, they should prioritize permanence for these most pro-growth provisions to maximize the benefits for the American economy.