Atlas Air isn’t a household-name airline – that’s what happens when you mostly carry cargo – but it buys a lot of big planes. In recent years, it acquired nine new Boeing 747s and six 777s, at a total cost of about $2.5 billion.
“Our business has been growing tremendously,” said Spencer Schwartz, the company’s chief financial officer. “For us to really grow, we need to add capacity, we need to add aircraft, and we expect to keep doing that.”
Schwartz is worried that Congress might soon make it harder for him to invest as much as he likes – by reducing how much of that investment he can quickly write off his taxes. It’s a valid fear, and it’s shared by many companies that are investing in American-made products right now.
It’s also a pretty good explanation of why Washington isn’t anywhere close to getting tax reform done.
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There’s basically a national, ideology-spanning consensus that the federal government should simplify the tax code. Almost every candidate running for ... anything ... agrees we should close loopholes and lower rates, particularly for corporate taxes, in the name of competitiveness.
The reason that’s not happening soon is that one company’s “loophole” is another’s lifeblood. For Atlas Air, that loophole is called accelerated depreciation. It allows the company to write off the lost value of new investments due to wear and tear and age – but faster than the value actually declines. It’s the largest single deduction claimed in the corporate code, and it is frequently a target for elimination under various tax reform plans, as a way of offsetting the lost revenue of a lower overall tax rate.
It is also, for Atlas Air and many companies like it, a big inducement to spend more money here in the U.S.
A few days ago, a collection of companies and industry groups called the CRANE Coalition released an economic study arguing against elimination of accelerated depreciation. The point of the study is that ending accelerated depreciation would save money in the short term, but not in the long run, because companies would still write off the full declining value of their assets, just over a longer period of time.
“In addition,” it goes on to say, “accelerated depreciation plays an important role in stimulating investment and economic growth. Loss of that provision would alter the investment decisions of many capital-intensive businesses.”
The blunt way to put that is, “some companies will spend less, grow less and hire less.” Atlas Air executives say that’s true for them.
If the depreciation provision was eliminated, “our cash income tax liability would increase substantially and dramatically – tens of millions of dollars of cash income tax more per year,” said Scott Roper, the company’s vice president for taxation. “We would be forced to reduce our purchase of new aircraft correspondingly.”
If Atlas Air had to pick between, say, a 10 percentage-point cut in the total tax rate, and keeping accelerated depreciation on the books, “we would choose the depreciation benefit, hands-down,” Roper said.
Of course, plenty of companies would like to see both lower rates and the continuation of preferred tax benefits. That’s true for Praxair, an industrial gas supplier that spends about $2 billion a year on capital investment, according to its executives.
“If I could have both accelerated depreciation and tax simplification with a lower rate, I could envision our economics looking better” as a company, said Tim Heenan, Praxair’s vice president of treasury and tax. He also said the company, which operates in more than 30 countries, would probably be more likely to invest dollars in the United States that could have gone abroad.
The problem is, every benefit in the tax code has champions. Those champions would prefer to pay for lower rates by eliminating someone else’s preferred benefit. An actual tax overhaul would require picking winners and losers among those groups, all of whom have champions in Congress. Which is why reform is so hard to do.