By Margo Thorning, senior vice president and chief economist, American Council for Capital Formation
Business investments are judged on the basis of their costs and benefits and until there is more convergence on the wide range of climate modeling, businesses are unlikely to make any adaptations beyond “no regrets” steps (or changes that would be undertaken in the normal course of business). Examples of this might include companies that are developing more drought-resistant seeds or hardening coastal infrastructure at risk from sea level rise. Businesses seeking to adapt “no regrets” adaptations to changing climate and weather models are best served by a better economic climate for savings and investment, namely a tax code that retains robust capital cost recovery.
If policymakers want to see more “no regrets” steps from businesses, they need to understand how important cash flow is for new U.S. investment. New academic research provides evidence of the strong link between investment and cash flow; a dollar of current and prior-year cash flow is associated with $0.32 of additional investment for firms that are least likely to face difficulty in raising money in capital markets and with $0.63 of new investment for firms likely to face constraints. These results have implications for U.S. investment and job growth since ACCF research shows that each $1 billion in new investment is associated with an additional 23,300 jobs.
Commerce Department data bears out this type of growth as energy-producing states including Texas, Oklahoma, Montana, Wyoming, North and South Dakota and Nebraska are seeing impressive income and job growth gains mostly attributed to the growing demands for their commodities, including oil and gas. The boom in energy, including low natural gas prices, has also benefited other industries including steel, chemical and plastics manufacturers; plants are being built and workers are being hired.
Much of this investment and job growth can be attributed to investment-favorable tax provisions including accelerated and bonus depreciation, Last In First Out (LIFO) and Section 199, which unfortunately are all on the table for potential elimination as a trade-off for reductions in lowering corporate tax rates. This could have a significant negative impact on employment and economic growth.
Instead of making some segments of the business community better off at the expense of others, policymakers should retain or enhance capital cost recovery rules in order to promote new investment, including new infrastructure that can adapt to changing weather and climate models. For example, making 50% bonus depreciation permanent today while lowering the business tax rate over time (e.g., 1-2% per year for the next 5-10 years) would provide a strong boost to private sector investment.
Better still, they should consider a consumed income tax in which all saving is deducted and all investment is expensed. Dr. Allen Sinai, president and chief global economist of Decision Economics conducted a macroeconomic analysis and found that if a consumed income tax system had been in place starting in 1991, GDP would have been 5.2 percent higher, consumption and investment would have been greater, and employment higher by over 140,000 jobs per year by 2001. In addition, federal tax receipts would have been $428.5 billion larger in 2001 compared to the baseline forecast.
Adapting to climate variations will be easier for countries with growing economies and prospering businesses and consumers. In order to finance new technology innovations, businesses will need strong portfolios and growing assets. The right tax provisions can help pave the way forward for lawmakers from both sides of the aisle, and that’s a boat that they should all be willing to come aboard.
Thorning is senior vice president and chief economist of the American Council for Capital Formation (www.accf.org), a nonprofit, nonpartisan organization advocating tax, energy, regulatory and environmental policies that facilitate saving, investment, economic growth and job growth.