Corporate Tax Break on Equipment May Have Silver Lining ...

WASHINGTON ? A corporate tax break for buyers of computers, engines and other equipment is proving surprisingly popular, depriving the federal government of tens of billions of dollars in expected revenue and increasing the amount it will need to borrow this year.

The Congressional Budget Office said this week that corporate income tax receipts were $10 billion below its expectations in the fiscal year that ended in September, and that it had reduced the anticipated amount that the government would collect for the current fiscal year by $29 billion.

The shortfall is a main reason the budget office projects the federal deficit will reach $1.08 trillion this year, $105 billion more than it estimated last August.

But there may be a silver lining. The tax break aims to stimulate investment, and it seems to be working. Corporate spending on equipment has grown faster than any other category of economic activity over the last two years, raising the pace of overall growth. And the government projects it will eventually recoup about 80 percent of the money because companies that benefit now often face higher taxes later.

The surprising results highlight the difficulty that policy makers face in predicting both the costs and the benefits of government policies. Efforts to stimulate the economy have been particularly contentious, with critics arguing that the government has little power to influence businesses, and that the costs would be greater than expected. In this case, it appears that those critics were only half right.

Werner Enterprises, a large trucking and logistics company based in Omaha, said in November that it spent $225 million buying trucks in 2011, almost twice as much as it spent in 2010, to take advantage of the tax break.

Ameren Missouri, a St. Louis utility, said the tax break was a major reason that it increased 2011 capital expenditures by 30 percent, to $1.3 billion, installing equipment ahead of schedule at two power plants.

Other companies, however, said the only result was a smaller tax bill.

Nicholas DeBenedictis, chief executive of Aqua America, a Pennsylvania water utility, described the tax break as ?a gift.? At an investment conference in December 2010, he said, ?It didn?t make us spend one extra dime than we would have spent.?

The tax break is called bonus depreciation. It amounts to a subsidy for equipment purchases. In general, when a company pays a worker, the cost reduces its taxable income. When it buys a computer, however, only a fraction of the cost counts against taxable income in the first year, because the computer is an investment. The company spent money, but in return it got something of value for years to come.

The government suspended this distinction from September 2010 through the end of 2011, allowing companies to count the entire cost of such equipment purchases as an expense that reduced their taxable income. Companies were allowed from 2008 to September 2010 to count 50 percent of purchases as expenses, and that lesser tax break remains in effect now until the end of 2012.

The administration estimated in the fall of 2010 that the expanded tax break would cost the government about $100 billion.

The actual bill will not be certain for some time, until corporations file detailed tax returns. But there is growing evidence that the cost will be higher than expected. The budget office calculates that the government collected a smaller share of corporate profits last year than at any time in the last 40 years ? just 12 percent of the money earned from domestic activities ? in large part because of the tax break.

Receipts increased during the first three months of the current fiscal year, but not nearly as much as the budget office had expected.

The budget office?s director, Douglas W. Elmendorf, described the trend as ?a little puzzling? this week.

The Treasury Department, which prepares its own estimates of tax revenue as part of the administration?s annual budget, declined to comment ahead of the forthcoming release of those projections. But a senior administration official said the Treasury also had overestimated corporate income tax payments. The official, who spoke on the condition of anonymity because he was not authorized to discuss the issue, said that the administration had concluded that the unexpected popularity of the tax break on corporate investment was the primary reason for the shortfall.

Other factors also may be contributing. Companies lost a lot of money in recent years, and in some cases they can deduct those losses from their taxable income. Domestic financial doldrums also have led companies to expand overseas, so that less of their income is subject to federal income taxes. The budget office maintained its projection that corporate tax receipts would rebound completely by 2014.

But both the Obama administration and House Republicans want to restore the full 100 percent break for the entirety of 2012.

And some experts warn that what began as a bonus is becoming a permanent break. The government has now offered a version of this tax break in seven of the last 10 years: from 2001 through the end of 2004, and again beginning in 2008.

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