Revisiting the investment tax credit: who will benefit?

The investment tax credit which found its origin in the Administration of President Kennedy, is working its way to the forefront of the nation's tax picture. The provision, which generally allows a dollar-for-dollar reduction of tax due, based on the investment in certain property, has always been controversial. Critics have contended that the credit produced a tax windfall for business investments that would have been made anyway and credits were taken for purchases of equipment that did not really increase productivity. As a result, the investment tax credit was repealed by the Tax Reform Act of 1986 as part of that legislation's move toward a simpler, fairer and more efficient tax system, based on lower marginal tax rates.

Recently, the prolonged economic slowdown has given new life to the investment tax credit. In 1992, the Bush Administration brought the credit to the table in its attempt to provide an economic stimulus. However, even officials within that Administration had concerns about the costs and the past criticisms about the investment tax credits' effectiveness as a business stimulus and opted to allow accelerated depreciation on new equipment purchased rather than reinstall the investment tax credit.

President Bill Clinton made it clear during his election campaign that the centerpiece of his economic plan was the restoration of an investment tax credit. The new credit would be aimed at providing an incentive for businesses to increase their purchases of a new plant and equipment, which would in turn enhance the productivity of those businesses, thereby leading to employment gains and a stimulated economy.

The new Administration is expected to follow through on the campaign pledge and propose a 1096 incremental investment tax credit on investments above a set base amount (i.e., a credit on equipment purchases above $100,000 of investment). At present, the proposals have not specified what property will qualify for the investment tax credit. It has been hinted that the credit may be targeted to specific industries. This would differ from the prior broad based tax credit that was generally applied to the cost of any tangible properly used in a trade or business.

At the request of the House Ways & Means Committee Chairman Dan Rostenkowski and Treasury Secretary and former Senate Finance Committee Chairman Lloyd Bentsen, Clinton has suggested that any investment tax credit enacted would be retroactive to include investments made after December 3, 1992. This decision was made in order to spur investment at end of the 1992 tax year, as the fear existed at that time that businesses would hold back from making investments in property in anticipation of any future investment tax credit that would be passed. The feeling was that any delay in investment would prolong the recession.

Legislative debate continues concerning the effectiveness of the investment tax credit and what industries it will directly affect. Senator Daniel Patrick Moynihan, who is expected to become Chairman of the Senate Finance Committee, has questioned the effectiveness of the investment tax credit, but said he will support it. Others would prefer a broad based investment credit, and still other legislators suggest a lower rate, approximately 7 percent, instead of the 10 percent credit applied to only new investments in tangible business properly.

Another potential limitation in the use of the new credit is that it may be available only to the extent aggregate purchases of qualified property exceed an established base amount. The effect is that the credit will provide an immediate stimulus to those industries which produce the equipment that qualifies for the credit.

Obviously, industries should keep a watchful eye on the tax legislation that will be proposed in 1993.

Congressional tax writing committees, frustrated by Mr. Bush's veto of last year's tax bills, are ready to move quickly on new tax legislation, when President Clinton finally unveils his economic growth plan. Once that plan is established, Congress is likely to resurrect many of the provisions of last year's vetoed tax bills.

Although Clinton made a pledge for strong economic stimulus during his campaign, recent indications that the economic recession is reversing may change his thinking about short-term stimulus compared to the alternative of a program that focuses on long-term growth and deficit reduction. Whatever legislation is passed by Congress, we all eagerly await any new tax advantages and economic stimulus that these revisions can be expected to produce.

Arthur L. Heisman, CPA and Jeffrey S. Hershow, CPA are partners in the Los Angeles office of Urbach Kahn & Werlin Certified Public Accountants.