US Treasury issues depreciation study at the end of July

US Treasury issues depreciation study in July 2000 | Norton Rose Fulbright

September 01, 2000 | By Keith Martin in Washington, DC

The long-awaited study was ordered by Congress in 1998 after several industry groups complained that they were being forced to depreciate equipment over a longer period than the real economic life.

The study says the “class lives” on which tax depreciation is based are out of date, but it would take time and resources to update them. More than half of class lives were set in 1962 based on use studies conducted during the 1950’s.

The study argues that economic studies — now 20 years old — suggest that tax depreciation is actually more generous in most cases than “economic” depreciation, or the rate at which assets actually depreciate in real life. One way to test this proposition is to look at whether the effective tax rate in an industry falls below the statutory rate of 35%. Treasury calculates the effective tax rate for electric light and power companies, for example, is 31.5%. This compares to a corporate average of 30.9%.

Nevertheless, the study points to a number of factors in the power industry that will tend to make equipment in that industry obsolete more quickly. These include deregulation — generators are forced to maintain state-of-the-art equipment to remain competitive — advances in gas turbine technology, and the possible spread of distributed generation. The study also points to disparities in how the same generating equipment is depreciated depending on who owns it. For example, a power plant owned by a factory and used to generate power for internal consumption is depreciated over 15 years, while the same power plant owned by a power company and used to generate electricity for sale might be depreciated over 20 years.

What’s next? Congress is unlikely to act on the report this year. Some action is possible next year, although neither presidential candidate has made this an issue and Rep. Bill Archer (R.-Texas) — the strongest advocate for updating depreciation allowances — is retiring from Congress.

A group organized by the Edison Electric Institute is lobbying Congress to allow all generating equipment to be depreciated over seven years. Most power plants are depreciated currently over 15 or 20 years.

Keith Martin