When lawmakers return to Washington, DC, later this fall, they will debate an annual “extenders” package. Extenders packages typically renew, temporarily, a grab bag of various expiring tax policies. In this year’s extenders package, lawmakers are likely to address two tax provisions related to the treatment of business investment. They should avoid making these policies temporary and retroactive.

Both potential business tax extenders originate in the Tax Cuts and Jobs Act (TCJA). First is the requirement that businesses amortize research and development (R&D) costs over five years, which went into force at the beginning of this year. Before this year, businesses could fully expense research and development costs. Second is 100 percent bonus depreciation, which allows businesses to fully expense short-lived assets. This provision begins phasing out next year. Both changes were included in the TCJA to reduce the law’s budgetary impact.

Lawmakers are correct in wanting to cancel both. Expensing addresses one of the downsides of business taxation: It discourages investment by raising its cost. Under expensing, businesses deduct the full cost of an investment immediately, which eliminates the tax on new investments. However, existing and highly profitable investments still face a tax. As a result, the business tax can raise revenue without discouraging new productive investments.

Unfortunately, lawmakers may repeat the mistake of the TCJA and only temporarily delay both changes. Temporarily delaying these changes is an attractive option for lawmakers because it looks cheap over the 10-year budget window. The effect of expensing on business taxable income reverses, resulting in higher business tax revenue in the future. For example, permanently canceling R&D amortization would cost $153 billion over 10 years, while a four-year delay would only cost close to $4 billion over the same period.

Although cheaper, a temporary delay of these policies is worse policy. Temporary business tax policies create uncertainty for taxpayers. It makes it harder for businesses to plan if they are unsure whether certain provisions will be available.

It is also possible that lawmakers will make the temporary delay of amortization of R&D retroactive to January 1, 2022. As a result, research and development costs incurred this past year will qualify for expensing. This would both make the policy more expensive and has little economic justification. Businesses already made investments in 2022 under a tax code that required amortization. Providing expensing to R&D that took place this year would have no impact on incentives (unless taxpayers had a time machine).

Canceling the amortization of R&D and the phase-out of bonus depreciation is the right thing to do. However, lawmakers should avoid only temporarily delaying these changes or making them retroactive. Expensing should be a permanent part of the tax code.

The post Lawmakers Should Avoid Temporary and Retroactive Tax Policy appeared first on American Enterprise Institute – AEI.