With the crafting of a reconciliation package in full swing, the fate of the Inflation Reduction Act (IRA) hangs in the balance. Much of the discussion in Washington has centered on what will happen to the energy tax credits. Defenders have called for a scalpel approach, while opponents want to sledgehammer the entire law. Little attention, however, is focused on what tax policy could replace the plethora of technology-specific credits. In a new paper, we outline how full expensing is a pro-growth, pro-environment policy that doesn’t pick winners and losers. 

Full expensing (also known as immediate expensing or bonus depreciation) allows businesses to immediately deduct the full cost of new investments from their taxable income, rather than spreading those deductions over multiple years. Although details differ between proposals, expensing includes equipment, research and development, and facilities. 

Under current law, when a company builds a wind farm or installs factory machinery, it must depreciate that asset over a prescribed schedule of multiple years. This delay means the company cannot recover the cost of the investment in the first year. That inflates its taxable profit higher than its actual cash profit. In effect, the tax code penalizes up-front investment by eroding the real value of deductions through inflation and time. It is a tax on income that does not exist.