Used-gear tax break slows GDP growth

Sherrill Manufacturing, a maker of flatware, is spending at least half of its $250,000 capital budget this year on used equipment, including 20-year-old knife-making machinery that can be written off right away under the new tax law.

“There is still a lot of used equipment here in the U.S. at relatively bargain prices compared to buying new,” said Gregory Owens, chief executive of the company that calls itself the last remaining flatware manufacturer in the U.S. “If it performs about the same, why spend five times the price of used?”

Owens’s decision to buy used, rather than new, machinery highlights a quirk in the tax law championed last year by President Donald Trump. When praising the law, Trump has said a provision that lets companies immediately deduct costs for things like equipment and facilities could have a bigger impact than anything else in the bill.

Yet that provision also makes old equipment eligible for the break, and vendors say those sales are surging. That could hinder growth tied to the new incentive, and make it harder for Trump and Republicans to meet their promised goal of at least 3 percent annual gross domestic product. While old equipment sales could move machinery to more productive owners, it doesn’t add to the nation’s productive capacity or create jobs in manufacturing new products.

“It is arguably not desirable,” said Eric Toder, institute fellow at the UrbanBrookings Tax Policy Center. “Buying new equipment is investment. This is not a net investment to the economy. It is moving capital from one owner to another.”

Under the old tax code, companies could gradually write off the costs of their capital spending.

They had been allowed to deduct half of certain capital expenditures right away under a temporary provision known as bonus depreciation.

The new law allows for full and immediate write-offs through 2022. After that, the percentage of the cost that can be immediately deducted gradually phases down.

Sales of used equipment and machinery aren’t tracked directly by the government, but dealers say there has been a significant increase this year.

Buying used equipment can save money, just as a used car is cheaper for consumers, and sometimes can be available sooner.

For example, a Class 8 truck — a heavy duty truck used in shipping — might cost $150,000 to $200,000 new, while a 3- to 5-year-old version would go for $50,000 to $90,000, said Christopher Ciolino, a Bloomberg Intelligence analyst.