July 1, 2011 By Philip Greenspun
Listening to a government-sponsored radio news broadcast this yesterday, I heard Barack Obama talking about his plans for closing up the nation’s larger-than-Greece’s federal budget deficit (don’t forget that the states are also running deficits by underfunding public employee pensions) by eliminating tax breaks for corporate jet owners.
I did a little research and found out that he was talking about a regulation that allows new aircraft to be depreciated more rapidly than the 7-year standard. This article explains the issue reasonably clearly. The depreciation schedule tweak was put in as a favor to aircraft manufacturers and their mostly unionized work forces. It makes new aircraft relatively more attractive than used aircraft. As U.S. companies such as Cessna and Bell lose market share to more innovative foreign manufacturers, however, many of the benefits are going to foreign or foreign-owned aircraft makers.
As I wrote in my economic recovery plan for the U.S., I’m personally in favor of allowing businesses to depreciate capital goods on whatever schedule makes sense for them. It avoids the bizarre situation of a company being cashflow-negative and still owing tax.
President Obama made it sound as though the change would raise a lot of revenue for the federal government. The reality is that changing the rules wouldn’t raise an additional dime from companies that already own planes. Nor would the rule change change the total amount that a company can deduct for an aircraft used for business. Tweaking the rules means that the federal government gets tax revenue possibly a little sooner or later than it would have otherwise. With interest rates down around 1.5 percent for 5-year Treasuries, the value to the Feds of getting the money sooner is low.
The final problem with Obama’s plan to raise big $$ via this rule tweak is that aircraft sales in the U.S. are very slow. Since the U.S. economy isn’t growing and aircraft last a long time, there is little practical need for a lot of new corporate jets.
Obama’s plan would help accountants and tax lawyers, but it is hard to see how it would have a significant effect on federal tax revenues. Furthermore, the way that he phrased it in his speech was misleading to citizens who would have concluded that somehow the federal government was ladling out cash for corporate jets in the same way that it does for energy efficiency, electric cars, ethanol, etc. Obama proposed to close one of the world’s largest government spending gaps by changing the depreciation schedule on a small and shrinking class of capital equipment purchases.
Source: BUSINESS INSIDER