When drafting sweeping legislation, mistakes are bound to pop up. These are normally identified and fixed in “technical corrections” bills, or in other subsequent legislation. The Tax Cuts and Jobs Act (TCJA), a comprehensive overhaul of the nation’s tax system, has been no different. Experts have moved quickly to identify the most significant errors in the legislation and to propose quick fixes, but Democrats appear set on stamping their feet and refusing to help as a way to get back at Republicans.
At the heart of the issue is the so-called “retail glitch.” The retail glitch came out of efforts to simplify the tax code by consolidating four different types of interior building improvements which had previously been subject to long depreciation schedules into a single category: Qualified Improvement Property, or QIP. Under the TCJA, assets which had previously been subject to a depreciation schedule of 20 years or shorter were instead eligible for five years of “full expensing.”
This was an important change in the Tax Cuts and Jobs Act. Full expensing allows businesses to deduct the full value of an investment immediately, instead of spreading out the deduction over the course of many years. This encourages business investment for two reasons — one, because businesses prefer cash today to cash in the future, and two, for the simple reason that full expensing is less of a tax compliance hassle than depreciation schedules lasting decades.
The TCJA’s authors intended to give QIP a depreciation period of 15 years. However, in drafting the TCJA, writers neglected to assign QIP a depreciation period, resulting in QIP automatically receiving a depreciation period of 39 years and making it ineligible for full expensing (which only applied to assets with a depreciation period of 20 years or less).
The upshot of this error is that firms, predominantly retailers (hence the name), will receive far less of a tax break for building improvements than they would have otherwise. The Tax Foundation estimates that, due to inflation, business owners making interior building investments will only be able to recover $42.12 of a $100 investment, where the TCJA intended them to be able to deduct the full value of their investment. That’s a massive effective tax increase that applies to a specific type of investment that no one intended or wanted.
The fix is simple. Congress simply needs to pass legislation assigning QIP the 15-year depreciation period it was supposed to have in the first place, thus making it eligible for full expensing for five years before reverting to the shorter 15-year recovery afterward. In the past, these kinds of changes have been simple and bipartisan, such as in 1988 after the 1986 tax reform.
But rather than helping Republicans fix an error that affects businesses and taxpayers, Democrats appear more interested in holding TCJA fixes hostage for substantive liberal policy changes, and are willing to harm the Americans that would be affected by legislative errors in the TCJA.
Though to be fair, not every Democrat is on board with this strategy. Legislation to fix the retail glitch was introduced in both the House and the Senate by one Republican and one Democrat in each chamber. Yet more Democratic support will be needed if American taxpayers are to avoid being left out to dry by congressional slap-fights.
Hopefully more Democrats agree to stop playing games with important legislation and come to the table.
Andrew Wilford (@PolicyWilford) is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to fiscal policy analysis and education at all levels of government.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.