Case Overview, Tax Code Depreciation Schedule for Computers and Peripheral Equipment

This document provides background information and summarizes the debate over computer depreciation. The links to the left will lead you to public documents that we have found.

           After a piece of equipment is installed in a business or factory it immediately loses value. And as it is used over time it progressively loses more value. A computer is a good example. Once it has been installed it will experience some wear and tear and will quickly become outmoded as new versions, faster and more powerful, reach the market. The new, improved model may even be priced at the same level as the older, installed machine.

           A piece of installed equipment is, for accounting purposes, an asset. That is, when a business files its tax return, it must accurately account for the true value of that enterprise. Think for example of an airline: we could not know the value of that business without knowing the value of the planes it operates. Since the value of equipment decreases over time an accounting statement must incorporate a calculation as to the rate at which an asset is depreciating. If companies were left to their own devices to determine the depreciation of their equipment, they would tend to assess it as low as possible. The less valuable the equipment, the less current value of their company and many accounting steps later, less taxes to pay to the government. For that reason the government sets the depreciation schedules to specify how much equipment may be devalued each year for a fixed number of years.

           During the 106th Congress some business groups tried to persuade Congress to change the depreciation schedule for computers and computer peripherals (such as printers and scanners). The operative schedule allows computers to be depreciated over five years. Proponents (particularly the printing industry) argued that computers are generally replaced before five years because businesses can gain productivity by buying new machinery before the five years are up. If that's the case why shouldn't depreciation schedules reflect the real rate at which the equipment loses its value?

           The obstacle is that an accelerated depreciation schedule will cost government money by reducing tax revenues. Again, if businesses are worth less because their equipment is worth less, they will then owe less in the way of taxes. The upside, though, is that a change accelerating depreciation can arguably stimulate the economy. As one lobbyist pressing for a change put it, "In this case the tax code slows economic growth because our members say they would replace computer equipment sooner if they could depreciate the value of computer equipment over a shorter period."

           Two competing accelerated depreciation bills emerged. One was focused just on changes in the schedule for computer equipment. The second and much broader bill was aimed at changing depreciation schedules across a wide range of equipment. This second bill would have been much more expensive but even the narrower computer bill threatened to expand to something much larger. Once a tax bill to help an industry gets moving through the Congress, many other industries will push for aid as well. Legislators will do what they can to help industries concentrated in their districts or states so that they can be included in whatever tax bill is moving forward.

           Neither bill made much progress in the Congress. The business coalition working on behalf of the broader bill never emerged as a strong and active voice, most likely because it sensed that the proposal wasn't going anywhere. Even if Congress were to pass such legislation, President Clinton said he would veto it. In the summer of 2000, as the end of the Congress loomed, one pro-business lobbyist acknowledged that the legislation wasn't going to move before adjournment. He rationalized, "We are setting the stage for next year, when there is a new president and a new Congress." Despite the new president and the new 107th Congress, the result was the same and changes in depreciation schedules were not enacted in that session either.