Sen. Ted Cruz (R-TX) on Thursday reintroduced the Cost RecoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages.
and Expensing Acceleration to Transform the Economy and Jumpstart Opportunities for Businesses and Startups (CREATE JOBS) Act that would substantially reform the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
treatment of business investment. The legislation permanently enacts expensing for equipment and machinery and research and development. It introduces a neutral cost recovery system for structures (NCRS), which is economically equivalent to expensing.
Among tax legislation introduced this Congress, the CREATE JOBS Act contains the most pro-growth and fiscally responsible tax reform ideas while avoiding saddling businesses with complicated rules. By building on the most pro-growth elements of the TCJA—namely expensing of investment, and similar treatments like NCRS—this bill will make US industry more competitive and incentivize domestic investment.
What does the CREATE JOBS Act Do?
The first section of the proposal makes 100 percent bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
for short-lived assets, or Section 168(k), permanent. The 2017 Tax Cuts and Jobs Act (TCJA) temporarily provided 100 percent bonus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment.
, but it phased down beginning in 2023. One hundred percent bonus depreciation permits firms to immediately write off investment in assets with lives of 20 or fewer years. Currently, businesses can only immediately write off 40 percent of their investment, with the rest deducted over time, and it will phase down to 0 percent in 2027. The bill makes 100 percent bonus depreciation retroactive to the end of 2022.
The second section of the proposal would improve the cost recovery treatment of investments in structures and buildings by implementing NCRS, providing the same economic benefit as full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
using a different mechanism. Under NCRS, the deductions currently taken under the 27.5- and 39-year depreciation schedules for real estate investments would be adjusted to maintain their real value over time.
NCRS would apply to new structures that businesses put in place as well as the deductions that have yet to be taken going forward for existing structures.
The third section would restore immediate deductions for research and development (R&D) costs. Because of a change made in the TCJA, R&D costs currently must be amortized over five years or 15 years, a departure from the historical norm of expensing R&D. The bill would make R&D expensing retroactive to when the policy expired in 2021.
What is the economic impact?
According to the Tax Foundation General Equilibrium Model, the CREATE JOBS Act would grow the long-run economy by 2.9 percent, expand the capital stock by 5.3 percent, lift wages by 2.3 percent, and expand hours worked by more than 775,000 new full-time equivalent jobs. Retroactive extension of policies does not contribute to long-run growth, but it does add to the fiscal cost of the bill.
How does this bill compare to other major tax legislation?
The Tax Foundation estimates that making the entire TCJA permanent, which includes permanent extension of 100 percent bonus depreciation and full and immediate write-offs of R&D investment, would grow the economy by 1.1 percent, lift wages by 0.5 percent, and expand hours worked by 847,000 full-time equivalent jobs. It would cost $4.5 trillion from 2025 through 2034 on a conventional basis, $3.8 trillion on a dynamic basis.
Earlier versions of the TCJA did include expensing for structures, but lawmakers dropped the provision from the final bill due to budgetary and industry concerns.
We estimate that the House-passed version of the One Big, Beautiful Bill Act (OBBBA) would grow the long-run economy by 0.8 percent, boost wages by less than 0.05 percent, and expand hours worked by 983,000 full-time equivalent jobs. It would cost $2.6 trillion from 2025 through 2034 on a conventional basis, $1.7 trillion on a dynamic basis.
The OBBBA temporarily extends bonus depreciation and full write-offs of R&D expenses. Further, it includes a temporary provision that provides a full and immediate write-off for structures in select industries. However, temporary policy does not contribute to long-run growth.
The CREATE JOBS Act prioritizes permanence for the most cost-effective tax reforms—expensing and NCRS—to boost growth in a relatively fiscally responsible way. To further reduce the fiscal impact, policymakers could avoid retroactive extension.
Revenue projections of the CREATE JOBS Act are forthcoming and will be added to this analysis.
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