Small businesses are vitally important job creators and engines of economic growth. Congress can make it easier for small businesses to succeed and strengthen the recovery with real tax relief that lowers the cost of doing business. Senate Democrats have proposed the Small Business Jobs and Tax Relief Act of 2012, which contains common sense tax cuts for pay, raises, hiring, and spending on new equipment. Unlike Republican proposals that would just provide a profit-padding tax giveaway under the guise of small business support, the Small Business Jobs and Tax Relief Act would make it easier for small businesses to invest in themselves and their workers.
Summary of the Small Business Jobs and Tax Relief Act
1. Creates an Incentive For Small Businesses to Add New Jobs This Year. Although the economy is recovering from a severe economic recession, a tax credit designed to stimulate job creation and wage increases could help put more Americans back to work and provide tax relief targeted at America’s small businesses. This proposal would provide a 10 percent income tax credit on new payroll—through either hiring or increased wages—added in 2012. With a maximum increase in eligible wages of $5 million per employer and the amount of the credit capped at $500,000, the benefits of this tax credit will be targeted on America’s small businesses.
- CBO Deems It Effective Way to Spur Growth and Increase Hiring. The Congressional Budget Office has determined that proposals like this, which would reduce the cost to businesses of adding employees or increasing payroll, “would have the largest effects on output and employment per dollar…” compared to those that “affect businesses’ cash flow but would have little impact on their marginal incentives to hire…” [CBO, 11/15/2011]
- Leading Economists Support Tax Relief for New Payroll. Former Vice Chairman of the Board of Governors of the Federal Reserve System Alan Blinder has endorsed the idea as a job creator, proposing that “the basic idea is to offer firms that boost their payrolls a tax break. As one concrete example, companies might be offered a tax credit equal to 10% of the increase in their wage bills (over 2011 levels, say). No increase, no reward.” Other prominent economists who have endorsed the concept of increased payroll incentives include Paul Krugman and Mark Zandi. [Wall Street Journal, 7/12/2011; New York Times, 1/20/10; Moody’s, 9/9/2011]
2. Extends 100-Percent Depreciation Deduction For Certain Property. Typically, businesses expenditures are tax deductible in the year in which they are made, except for major purchases (such as large equipment or buildings), which must be written off over many years. One hundred percent depreciation allows businesses to write off the entire cost of major purchases in the year they are made rather than depreciate those expenses over many years. By accelerating in time the recovery of investment costs through “bonus depreciation,” additional first-year deductions for new investment lower the after-tax costs of plants and equipment. This encourages new investment and promotes economic recovery. Senate Democrats propose extending 100 percent first-year depreciation for one year, effective for qualified property acquired and placed in service before January 1, 2013 (or January 1, 2014 for certain longer-lived and transportation property).
- Bonus Depreciation is a Bipartisan Approach to Growing the Economy. Bonus depreciation has traditionally garnered bipartisan support:
- The Job Creation and Worker Assistance Act of 2002 was introduced by House Republicans and passed the Senate by a vote of 85 – 9. [Vote 44, 3/8/02]
- The Tax Relief, Unemployment Compensation Reauthorization and Job Creation Act of 2010 expanded bonus depreciation to 100 percent. The bill was passed in the Senate by a vote of 81 – 19. [Vote 276, 12/15/10]
- Last December, the House Republicans overwhelmingly voted for an extension of 100 percent bonus depreciation in H.R.3630. [Vote 923, 12/13/11]
- Bonus Depreciation is a Proven Way to Help Small Businesses Invest and Grow. According to the U.S. Department of the Treasury’s Office of Tax Policy, extending bonus depreciation will provide a tax cut to over 2 million businesses. In addition, the analysis estimates that 100 percent expensing reduces small businesses average cost of capital across all investment by more than 75 percent. [U.S. Treasury Office of Tax Policy, 11/2010]
- Economists Consider Bonus Depreciation One of the Most Productive Ways to Boost GDP. There is substantial empirical evidence that accelerated depreciation boosts business investment. For example, an analysis by the Institute for Policy Innovation estimated that every $1 of tax cuts devoted to accelerated depreciation generates about $9 of GDP growth. [Institute for Policy Innovation, 10/10/2001]
- Businesses Add Jobs When They Make Capital Investments. Studies by economists across the political spectrum have found that earlier, less generous versions of bonus depreciation have created 2 to 3 hundred thousand jobs. [American Economic Review, 7/2008]