Treasury officials have recommended, as part of the administration's forthcoming tax-simplification plan, elimination of one of the main features of President Reagan's big 1981 business tax cut, a depreciation provision that now saves corporations about $24 billion a year, administration sources said yesterday.
The provision is called ACRS for Accelerated Cost Recovery System. It allows businesses to write off the costs of plant and equipment faster than they could under earlier law; the faster write-offs mean larger deductions per year and lower taxes.
Its backers had predicted that it would stimulate increased business investment and economic expansion.
The Treasury officials are urging its elimination now as part of a flat-tax plan, under which there would be a trade-off for both businesses and individuals. Tax rates would be lowered, but in return many existing deductions, exemptions and other tax-reducing provisions in the code would be eliminated.
The tentative decision to drop ACRS was reached by Treasury aides at a meeting Friday. Their proposals now go to Secretary Donald T. Regan for review. Regan, who was at the Friday session, is scheduled to make his tax-simplification recommendations to President Reagan next month.
Reagan has said he wants the simplification plan to be revenue-neutral, meaning there would be no overall gain to the government nor loss to taxpayers. But some taxpayers and businesses would lose and others would gain.
One question, as the Treasury drafted its version of the trade-off, was whether it would bite the bullet of recommending that ACRS be dropped. Many large and powerful companies benefit from the provision and could end up losers without it.
The same question has cropped up about another tax provision, the investment tax credit, which will save businesses about $26.5 billion this year in effect by refunding part of the cost of new equipment in the form of lower taxes.
It was not clear last night whether the Treasury officials have recommended its elimination.
Both provisions are of special importance to the basic capital-intensive sectors of the economy, which include some industries like autos and steel that have been in big trouble in recent years and may argue that they need special help.
Under the current system, nearly all investments are placed in one of five main categories for writing off in 18, 15, 10, five or three years. That replaced the old useful-life concept that aimed to allocate depreciation deductions over the period in which an asset was used.
It is not clear whether Treasury seeks to return to the useful-life concept.
Supply-side economists in and out of the administration, who pushed for the accelerated depreciation in the 1981 bill, have said the investment incentives in that measure helped the economy come out of the recession and are stimulating investment in new plant and equipment at record rates.
However, Regan on several occasions has said publicly that the tax code should not be used as a kind of industrial policy, to help needy sectors of the economy. At a breakfast meeting with reporters last month Regan said that accelerated cost recovery has favored manufacturers over services, and he hinted that he thinks the tax system should be made more neutral.
Sources also said the feeling at Treasury is that businesses should not be encouraged, as they sometimes are now by the tax code, to purchase equipment just to get tax breaks.
It was not clear what tax rates the Treasury might propose for businesses as part of its new plan. The nominal corporate rate now is 46 percent.
Regan has said that as for individual income taxes, he probably will recommend a modified flat tax.