Bonus Depreciation Has Cost $220 Billion Since 2008

Last week, we made the case that an expired provision known as bonus depreciation be treated separately from the other tax extenders, both because it was intended as temporary stimulus and because the small cost of a one-year extension masks the huge cost of making it permanent. Specifically, extending bonus depreciation for one year would cost about $5 billion (before interest) while extending it year after year would cost $300 billion.

In fact, bonus depreciation has already added significantly to the current debt. The policy was first enacted in the 2008 stimulus and has been extended four times prior to its lapse at the end of last year.

The costs of these extensions, between 2008 and 2013, is a full $200 billion before interest, or $220 billion when interest is included. If it remains expired, the net costs will fall over time as businesses are no longer able to take accelerated deductions for equipment they previously purchased. By 2024, the primary cost of bonus depreciation will have fallen to $30 billion. However, that number excludes the substantial interest costs that accrue as businesses take advantage of the time value of money.

When including interest, bonus depreciation will have added $120 billion to the debt by 2024, even if lawmakers allow it to expire after one year. The costs would be somewhat higher if bonus depreciation were phased out over several years, but much higher if policymakers continue to extend it every year. If the practice of extending bonus depreciation continues for the next decade, the revenue that is set to be recovered in later years will never materialize, resulting in a total cost of $325 billion before interest, or $500 billion when interest is included.

The bottom line is that a permanent or long-term extension of bonus depreciation is extremely expensive. Policymakers shouldn't simply lump it in with the other tax extenders because its effect is larger and its intent is different than many of the other provisions. They should instead evaluate the need for bonus depreciation based on the economic situation. Then they should let it expire, phase it out, or make it a permanent part of the tax code while acknowledging its full costs. In any case, lawmakers should abide by PAYGO for the expiring provisions and fully pay for any policies they choose to extend.