Boost spending on equipment, create more jobs?

@CNNMoney September 12, 2011: 9:28 AM ET
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NEW YORK (CNNMoney) -- As part of his jobs plan, President Obama wants to extend special tax treatment to businesses who retool and buy more equipment.

Sure, at $5 billion, it's one of the smallest components of his $447 billion jobs plan announced Thursday, but still it has manufacturers excited that spending on machinery, parts and computers could pick up.

But will it create jobs?

Here's how the plan works: The proposal extends a measure already in place from Obama's December deal, that at tax time, allows businesses to deduct 100% of the money they spent on equipment.

The incentive, referred to as "bonus depreciation," applies to nearly any type of long-lasting equipment used for business purposes, other than a building itself. Items like industrial machines, tractors, refrigerators, wind turbines, computers and even a grocery store counter would all qualify.

Without the measure in place, businesses would typically have to deduct the expense over a several year period.

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"The real advantage is you get your money now, instead of piecemeal over several years. That has a positive effect," said Dan Meckstroth, chief economist with the Manufacturers Alliance.

As for creating jobs, the policy is thought to help in two ways. First, it lowers the tax bill of the company that's buying more equipment, possibly freeing up funds that could be used for hiring.

Second, it creates more business for the manufacturers who are making and selling the equipment to begin with, hopefully to the point where they need to hire more factory workers.

"Really, something like this benefits two types of companies... it's a two-for-one deal," said Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers.

That said, the policy hasn't necessarily lived up to its intended consequences. Reflecting on a similar measure tried under the Bush administration, Peter Orszag (then director of the Congressional Budget Office) wrote that "the experience from bonus depreciation provisions enacted during 2002 and 2003... was somewhat disappointing."

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Similarly Mark Zandi, economist for Moody's Economy.com, previously found this policy delivers less economic "bang for the buck" than other options, like extending unemployment benefits (which is also part of Obama's job plan).

There may also be an unintended consequence of extending the "bonus depreciation" program. Businesses that previously would have rushed to take advantage of the deduction by the end of 2011 may now wait until the end of 2012.

"If the extension becomes law quickly and business decision makers know that they have another year to take advantage of 100% expensing, the change would lessen a potential fourth quarter 2011 surge in equipment investment," Meckstroth said.

That said, spending on business equipment has so far been one of the main drivers of the recovery, in stark contrast to sluggish spending by consumers.

With the tax incentive in place for 2011, spending on equipment and software was already up $221.4 billion in the first six months of the year, or 10% compared to the same period last year.

Meanwhile, manufacturers that make long-lasting, or so called durable goods added back 162,000 jobs.

While some of that may simply be due to the business cycle revving up again following the recession, industry insiders also don't disregard the effect of the tax incentive.

"I think it's having an impact," Meckstroth said. To top of page

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