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Encouraging Modernization of the Industrial Sector and Other Energy-Saving Capital Investments through Tax Reform


December 19, 2012

White Paper

Authors:

Steven Nadel and R. Neal Elliott

Description:

Much of the equipment and production processes in America’s factories are decades old and not as efficient as modern equipment and processes in use by many of our international competitors.  Modernizing these factories will allow them to better compete in world markets by improving product quality and reducing product costs, including through reduced energy use. 

As we emerge from the Great Recession, many industrial firms have capital to invest, but a nudge from the tax code could spur substantial additional investments here in the U.S.  We suggest three possible tax  strategies that could spur investment but with low cost to the federal Treasury:

  1. Provide a low tax rate for repatriation of company profits provided these repatriated profits are used to increase a company’s capital investments relative to their average capital investments in recent years. 
  2. Allow accelerated depreciation on increased capital investments in production capacity, allowing companies to reduce their near-term taxes. 
  3. Provide repayable tax incentives for increased capital investments.  The credit would be taken on taxes in the year the expenses were made, but then the credit would be paid back to the Treasury in subsequent years. 

We recommend that at least two of these approaches be enacted.  The first approach would benefit only large multinational firms, while the second and/or third approach should be included in order to benefit firms that primarily serve the domestic market. A firm would only be able to use one of the approaches.

For the commercial sector, a different approach is needed since much of capital investment is for land and buildings and not for energy-consuming systems.  We suggest an option to provide accelerated depreciation for purchases of high-efficiency equipment in the commercial sector.