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 machinery to make knives that can be written off right away under the new tax law.
“There is still a lot of used equipment here in the US 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 US. “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% 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 Urban-Brookings 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.”
It’s still too early to tell if the $1.5tn tax cut is doing what Republicans said it would — but early indicators show it hasn’t really changed corporate behaviour so far. That puts even more pressure on the expensing provision, which is supposed to be one of the most stimulative pieces of the tax bill.
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.
Gross merchandise volume at Liquidity Services Inc, which operates the largest market for business surplus, was forecast by the company to rise about 10% in the quarter ended in June, excluding the loss of a Department of Defense contract.
“We have observed much more buoyancy on the buyer side,” William Angrick, chief executive officer of Liquidity Services, said in an interview. “We have seen assets languish for years” and finally get sold. “With more liquidity in the market, the cycle time to sell things has compressed.”
The Equipment Leasing and Finance Association’s monthly leasing and finance index, which covers volume for new and used purchases, rose 7% through May.
“A lot of companies are looking at not just new but used equipment,” said Ralph Petta, president of the association. While tax incentives have sometimes been used for new purchases, “it has never been done before for used equipment. It is a very fortuitous time to acquire assets.”
Construction equipment, trucks and farm equipment sales are rising, said Jefferies machinery analyst Stephen Volkmann in New York. Volkmann said the used equipment market has been “very hot” since the tax overhaul.
While the tax code can be used to promote growth, “it’s truly weird to make it apply to used equipment,” said Josh Bivens, research director for the liberal Economic Policy Institute in Washington. “This provides no economic benefit at all.”
The House Ways and Means Committee members considered the provision important especially for small businesses and farmers, a committee spokesman said. Expensing those purchases helps businesses expand, which in turn boosts hiring and wages, the spokesman said. Some economists say it’s not necessarily a negative to see old equipment sales rising.
“Whether equipment is new or used shouldn’t matter a great deal in terms of whether and by how much it improves a company’s productivity,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in New York and a former Federal Reserve researcher. “From a GDP standpoint, obviously, we would prefer that investment be in new equipment, but in terms of the wisdom of using the tax code to encourage investment, it shouldn’t matter much.”
New machinery purchases have been solid this year. Orders placed with US factories for business equipment cooled unexpectedly in May after an upwardly revised April jump that was the largest this year, indicating resilient demand, Commerce Department figures showed June 27.
Sherrill, which produces flatware at its plant in Sherrill, New York, expects productivity of its labour force of 56 people to be boosted by about 5% this year. The company credits tax cuts — also including lower corporate taxes — for helping to finance raising its wages about 4% this year. It has hired 10 workers this year.
“We are making capital investments because of tax reform,” said Owens. “The accelerated depreciation certainly helps in an environment where we don’t have unlimited sources of capital.”
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