Unlocking American Growth: How Cost Recovery Policies Drive Billions in Investment and Job Creation

Encouraging robust investment in the United States has been a consistent and bipartisan goal spanning multiple presidential administrations, reflecting a shared understanding of its critical role in fostering economic prosperity and enhancing global competitiveness. From the Obama administration’s American Recovery and Reinvestment Act to the House GOP’s "A Better Way" framework, which laid the groundwork for the Tax Cuts and Jobs Act (TCJA) of 2017, and the Biden administration’s suite of landmark legislation—including the Infrastructure Investment and Jobs Act of 2021, the CHIPS and Science Act of 2022, and the Inflation Reduction Act of 2022—each initiative has aimed to stimulate reinvestment, particularly within the vital manufacturing sector. President Trump’s tariffs and the subsequent One Big Beautiful Bill Act (OBBBA) of 2025 further underscore this enduring focus. A recurrent and potent policy lever within these proposals is accelerated cost recovery, which enables companies to deduct a larger portion of their investment expenses from their tax returns more quickly.

The Tax Foundation, utilizing its sophisticated macroeconomic model, has consistently highlighted the transformative power of improvements to cost recovery policy. Their research indicates that such policies represent the most impactful pro-growth options available, particularly when measured by the long-run increase in Gross Domestic Product (GDP) relative to revenue forgone. The most powerful iteration of this policy is full expensing, a mechanism that permits businesses to immediately deduct the entire cost of their capital investments. While macroeconomic figures like a 1.5 percent increase in long-run GDP can seem abstract, their real-world impact manifests tangibly at the community level: new factories rise, offices expand, housing developments flourish, better jobs emerge, and wages climb. These localized improvements, aggregated across the nation, constitute the broader economic growth. By subtly altering the financial calculus for millions of individuals and businesses, policies like full expensing can make a previously marginal project—one hovering between viability and non-viability—just attractive enough to proceed.

This detailed analysis delves into 15 specific case studies, illustrating precisely how changes in cost recovery policy can tip the scales for diverse investment projects, both large and small. By examining the Internal Rate of Return (IRR) across five distinct policy scenarios, this report demonstrates that quicker cost recovery is a vital policy instrument capable of fundamentally reshaping marginal investment decisions. The result is an increase in viable capital investment projects throughout the economy, leading to deeper capital stocks, enhanced productivity, and expanded opportunities for both workers and business owners.

The Foundational Importance of Investment for Economic Growth

Investment is a cornerstone of long-term economic expansion. At its most fundamental level, economic growth is propelled by three primary inputs: labor (the total hours worked), capital (encompassing both physical and intangible tools), and total factor productivity (which captures increases in output not attributable to additional labor or capital, often associated with technological advancement and innovation). New investment plays a crucial role in elevating worker productivity through a process known as capital deepening. This means providing workers with more and better tools, enabling them to produce more efficiently. For instance, a farmer with a state-of-the-art tractor can cultivate more land, a steelworker with a powerful furnace can produce more steel, and a statistician with advanced computing power can conduct more sophisticated analyses. This increased worker productivity is directly linked to higher wages and an improved standard of living for the populace.

While the impact of investment on total factor productivity is a subject of ongoing debate within economic literature, evidence suggests that investment can appreciably influence technological adoption, if not directly shape the pace of new inventions. Even if it doesn’t spark new breakthroughs, it can significantly accelerate the implementation and widespread use of existing technologies.

Investment generally categorizes into three main types:

• Equipment: Physical machinery directly involved in production, ranging from machine tools in a factory to office computers, specialized instruments, and even basic fixtures.
• Structures: Longer-lived assets integral to the production process, such as office buildings, manufacturing plants, warehouses, and retail storefronts.
• Intellectual Property Products (IPP): This broad category includes research and development (R&D), software development and purchases, and the creation of artistic and entertainment originals. R&D is often the largest component and a key focus of policy discussions.

Taxation’s Influence on Investment Decisions

Companies make investment decisions based on whether the net present value of a project is positive, meaning the anticipated future benefits outweigh the upfront costs. The concept of the "time value of money" is paramount here; a dollar today is valued more highly than a dollar in the future, as today’s dollar can be invested to yield more than a dollar later.

A project’s Internal Rate of Return (IRR) is the discount rate at which the present value of its future cash flows precisely equals its initial investment cost. Essentially, it’s the breakeven rate. If a project’s IRR surpasses a company’s "hurdle rate" (the minimum acceptable return), the investment is deemed worthwhile. Taxes directly impact investment decisions by altering the IRR. When companies can immediately deduct investment costs, they realize the full tax benefit upfront, enhancing the project’s profitability. Conversely, if deductions are stretched over time, the future tax savings are devalued, creating a "tax penalty" that suppresses the IRR.

Consider a $1,000 investment in a new computer system. Under straight-line depreciation over five years, a company deducting $200 annually at a 21 percent tax rate would see $42 in tax savings each year. While the nominal total is $210, discounting these future savings at, say, a 7 percent annual rate, reduces their present value to $184.26, representing a $25.74 tax penalty. In contrast, full expensing allows an immediate $1,000 deduction, yielding $210 in tax savings immediately, with no present value loss or tax penalty. This immediate realization of tax savings effectively raises the project’s IRR. For marginal projects, this increase can be the deciding factor, shifting a project from "unviable" to "viable." It’s important to note that full expensing merely eliminates a tax penalty; it does not constitute a tax subsidy or encourage purely tax-motivated investments.

A Shifting Landscape: Historical Context and Recent Legislative Action

The tax treatment of different asset types has undergone significant changes over time, particularly with recent legislative packages.

• Equipment: Has a long history of "bonus depreciation," allowing larger upfront deductions, with remaining costs depreciated under Modified Accelerated Cost Recovery System (MACRS) rules over 3 to 20 years. Enacted at 30 percent in 2002, bonus depreciation was repeatedly adjusted before the TCJA increased it to 100 percent from late 2017 through 2022. It then phased down until the OBBBA of 2025 permanently restored 100 percent bonus depreciation.
• Structures: After substantial reforms in the 1980s, the tax treatment of structures remained stable, with the last major change in 1993 extending the asset life of commercial structures to 39 years. The 2016 House GOP blueprint proposed full expensing for all capital investment, including structures, but this was largely dropped from the TCJA. The OBBBA, however, introduced full expensing for a narrow subcategory of "qualified production property" (manufacturing structures), a significant improvement, albeit temporary (construction 2025-2029, service 2025-2031), which may limit its impact for long-cycle projects.
• Research & Development (R&D): Enjoyed full expensing for decades until the TCJA mandated amortization starting in 2022 (5 years for domestic, 15 years for foreign R&D). The OBBBA reversed this for domestic R&D, restoring full expensing, but maintained 15-year amortization for foreign R&D.

These shifts highlight a policy trend towards accelerating cost recovery, driven by the desire to stimulate investment and innovation.

The OBBBA of 2025: Progress and Limitations

The One Big Beautiful Bill Act of 2025 (OBBBA) marked a significant step forward in US cost recovery policy. It permanently reinstated 100 percent bonus depreciation for equipment, reintroduced full expensing for domestic R&D, and established temporary expensing for manufacturing structures. These changes collectively address key areas of investment, aiming to boost productivity and competitiveness.

Comparing the pre-OBBBA scenario (MACRS depreciation and R&D amortization, as it would have been in 2027 had bonus depreciation fully phased out) with the post-OBBBA reality reveals the magnitude of its impact. On average, the OBBBA’s policy mix increased the IRR of the analyzed projects by approximately 0.88 percentage points. This represents slightly over half of the potential IRR gains achievable under a scenario of full expensing for all assets. This indicates substantial progress but also underscores the significant remaining opportunities to further optimize the investment climate.

Deep Dive: 15 Case Studies Illuminate Real-World Impact

To concretely illustrate the policy’s effects, 15 representative case studies were developed across four industry groups: Energy and Supply Chain Infrastructure, Manufacturing, Technology, and Services. For each project, the IRR was calculated under five policy scenarios:

1. MACRS and R&D Amortization (baseline)
2. MACRS and R&D Expensing
3. MACRS for Structures; Equipment and R&D Expensing
4. Expensing for All (Placed in Service Rules)
5. Expensing for All (Cash Flow-Based)

The analysis reveals that moving from the baseline to full cash flow-based expensing for all assets raised the average IRR by 1.57 percentage points across all 15 cases. This incremental, yet impactful, change is precisely how expensing functions in the broader economy: not by making wildly uneconomical projects suddenly attractive, but by making a multitude of marginal investments across diverse sectors slightly more appealing, thus shifting more projects from the "pass" column to "build."

Sectoral Insights: Varied Impacts Across Industries

The impact of expensing varies depending on a project’s asset mix and capital intensity:

• Energy and Supply Chain Infrastructure:

  • Utility-Scale Natural Gas Plant: With no R&D, R&D expensing is irrelevant. Equipment expensing provides a substantial boost, raising IRR by over 1 percentage point (e.g., from 11.93% to 13.13%). Cash flow-based expensing further improves IRR due to long construction timelines.
  • Natural Gas Pipeline: Similar to the gas plant, equipment expensing significantly boosts IRR (e.g., from 12.63% to 13.95%). Cash flow-based expensing offers a more substantial lift than structures expensing, highlighting the impact of pre-service expenditures.
  • Package Sorting Facility: Significant 39-year property costs mean structures expensing provides a larger boost, pushing the project past a 13% hurdle rate.
  • Solar Farm: Predominantly equipment, solar farms see a major IRR increase from equipment expensing (e.g., from 11.31% to 12.32%), moving them from unviable to viable at a 12% hurdle. Structures expensing has minimal effect due to minimal building construction.

• Manufacturing:

  • Aerospace Parts Factory Expansion: R&D-intensive, so R&D expensing alone can shift viability (e.g., 13.95% to 14.53%). Equipment and structures expensing further enhance returns.
  • New Gas Turbine Factory: With a new building, structures expensing has a large impact (nearly 1 percentage point increase), alongside significant boosts from equipment expensing.
  • Steel Minimill: No R&D, so structures expensing provides the largest boost, pushing the project to viability at an 11% hurdle.
  • Semiconductor Fab: Large-scale, R&D-intensive projects benefit significantly from both R&D and equipment expensing. Despite the high equipment intensity, structures expensing still improves IRR, and cash flow-based accounting provides a boost due to multi-year construction before operational service.

• Technology:

  • Data Center: No direct R&D. Equipment expensing makes it viable at 10%, and structures expensing pushes it to 11%, even though chips and servers are the dominant costs.
  • Warehouse Robotics R&D: Primarily R&D-focused, thus R&D expensing is the most crucial factor, making the project viable at a 15% hurdle.
  • New Drug Development: This probability-weighted case, entirely R&D-driven, sees its viability solely influenced by R&D expensing, pushing it past a 15% hurdle.

• Services:

  • Quick-Service Restaurant: No R&D. Structures expensing has a profound impact, raising IRR by over 1.5 percentage points (e.g., from 9.48% to 11.04%), due to the high proportion of structure costs.
  • Supermarket: Equipment expensing helps, but structures expensing provides the biggest lift, making the project viable at a 12% hurdle rate.
  • Apartment Building: Predominantly structures, so structures expensing provides the largest boost (e.g., from 9.75% to 11.08%), shifting it from unviable at 10% to viable at 11%.
  • Limited-Service Hotel: Structures account for over 70% of upfront capital, making structures expensing the most impactful factor, increasing IRR by over 1 percentage point.

The sensitivity analyses, which tested the impact of a half-percentage-point reduction in operating cash flow margins, demonstrated that while these shifts can reduce IRRs, the overall trajectory of improvement under expensing policies remains consistent. However, for projects with very thin margins, such as supermarkets, even small operational changes can overshadow tax policy benefits, highlighting the interplay of various economic factors.

Addressing Remaining Gaps: Policy Recommendations for Enhanced Investment

While the OBBBA has made commendable strides, significant opportunities remain to further optimize the US investment climate. Policymakers could capture the remaining potential IRR gains by:

1. Permanence for Manufacturing Structures Expensing: The current temporary nature of manufacturing structures expensing (construction by January 2029, service by January 2031) creates uncertainty and may render the incentive inaccessible for projects with extended construction timelines, like semiconductor fabs. Making this provision permanent would provide stability and a consistent incentive.

2. Extend Full Cost Recovery to All Structures: The manufacturing structures deduction is limited. Expanding expensing to all commercial structures (offices, retail, hospitals, data centers) would eliminate tax penalties across broader industries. Furthermore, extending expensing to residential structures (e.g., apartment buildings) is a powerful tool to expand housing supply and reduce rents, consistent with historical economic evidence. A primary political hurdle is the upfront revenue cost of accelerating deductions. An alternative, neutral cost recovery, which adjusts deductions for inflation and the time value of money, offers a nearly economically equivalent outcome without the immediate large revenue cost.

3. Full Expensing for Foreign R&D: The OBBBA retained 15-year amortization for foreign R&D. While seemingly peripheral, foreign and domestic R&D are often complementary within multinational companies. A tax penalty on foreign R&D can reduce the viability of global projects that benefit US companies and workers. Furthermore, such penalties can shift funding for foreign R&D ventures to foreign competitors, rather than incentivizing more domestic R&D.

4. Safe Harbor Leasing or Transferability: A critical barrier to realizing the full benefit of expensing is the "loss-position problem." Companies with insufficient taxable income in a given year cannot fully utilize immediate deductions. The US has experimented with solutions:

   • Transferability: Successfully applied to renewable energy tax credits under the Inflation Reduction Act of 2022, allowing firms to sell unused credits, significantly reducing transaction costs and enhancing incentives. This principle could be extended to capital investment deductions.
   • Safe Harbor Leasing: Introduced in 1981, it allowed companies with low tax liability to "lease" equipment from firms that could utilize the deductions, effectively transferring the tax benefits. Reinvigorating such a policy could unlock further investment.
   • Alternatively, allowing firms to adjust Net Operating Losses (NOLs) generated by 100% depreciation deductions for inflation and a real rate of return could preserve the value of these deductions over time, mitigating the loss-position problem.

5. Full Cash Flow Basis: The current "placed-in-service" rules mean deductions are taken only when an asset becomes operational, not when costs are incurred. For projects with multi-year construction, this delays tax savings, reducing their present value. Moving to a cash flow-based system would align deductions more closely with actual expenditures, further enhancing the economic benefits of expensing.

Broader Economic Implications and the Path Forward

The detailed case studies unequivocally demonstrate that enhancing cost recovery mechanisms makes a wide array of investments more viable across the entire economy. These policy shifts translate directly into tangible benefits: more jobs, higher wages driven by increased productivity, greater innovation, and stronger global competitiveness for American businesses. The OBBBA represents a significant stride in this direction, capturing roughly half of the potential gains from comprehensive full expensing.

However, the analysis also illuminates substantial remaining opportunities. By making manufacturing structures expensing permanent, extending full cost recovery to all structures (potentially via neutral cost recovery), restoring expensing for foreign-sited R&D, and implementing solutions like safe harbor leasing or transferability to address the loss-position problem and adopting a full cash flow basis for deductions, policymakers can further unlock trillions in capital investment. Such comprehensive reforms would solidify the United States’ position as a premier destination for capital investment, driving sustained economic growth and prosperity for years to come. The path is clear for policymakers seeking to improve the investment climate and realize the full potential of the American economy.