How Bush's economic package could prod tech spending

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How Bush's economic package could prod tech spending

Larry Dignan
Department Editor, CNET Investor
Monday, October 15, 2001

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President Bush's economic-stimulus plan could give a needed boost to the tech sector and information-technology spending.

Bush recently outlined a broad tax stimulus plan to help the economy recover from the Sept. 11 terrorist attacks on the World Trade Center and the Pentagon. One of the agreed-upon techniques to boost the economy is so-called enhanced expensing, which would allow companies to depreciate assets at a more rapid clip.

Under the plan, a five-year depreciation period could be reduced to two years.

For the tech sector, beset by layoffs and profit warnings, depreciation--a reduction of earnings to write off the cost of an asset over its estimated useful life--is no small matter. Technology executives have long griped that tax rules don't reflect reality in the sector, which is defined by 18-month product cycles.

THE IDEA OF ACCELERATED DEPRECIATION isn't new, but with Bush's jump start, a handful of bills designed to give the tech sector a shot in the arm are more likely to become law.

If Bush's depreciation proposal is passed--and it may well be--companies will be able to amortize depreciation more quickly and boost the bottom line for a temporary time, likely one year.

Although it's early in the process, accelerated depreciation for tech companies may be around the corner. Companies that could benefit, according to Prudential Securities:

BEA Systems
BMC Software
Compuware
Computer Associates
Microsoft
Oracle
Siebel Systems
Hewlett-Packard
IBM
Intel
Texas Instruments

The Bush plan is designed to work across multiple industries, not just tech. That leaves one question: Will the plan help the tech sector break out of its doldrums?

HISTORY SHOWS that tweaking depreciation rates can spark capital spending, which in turn would help technology spending.

When President Reagan cut corporate depreciation rates in the early 1980s, it sparked a real-estate boom. In the 1960s, President Kennedy used "investment tax credits," essentially accelerated depreciation, to boost the economy, analysts said.

Analysts say a good deal of that capital spending will be on technology, largely because the one-time offer on accelerated depreciation will favor goods that have "low adjustment costs," meaning they deliver a quick return and are easily acquired and installed.

SOFTWARE AND IT equipment fits the bill for goods that have low adjustment costs.

Before any company gets a depreciation bounce, Congress will have to mull over the details. But if the Bush stimulus plan is enacted, software companies could see the biggest benefit.

Companies such as Siebel and Oracle have demand for their products, but customers are delaying purchases to see how the economy will shake out. Microsoft could see companies make an early leap to its new Windows XP operating system. And storage companies may experience some increased spending, analysts said.

Simply put, any company on the fence about an IT project may take the plunge with accelerated depreciation.

WORRIES ABOUT THE ECONOMY could limit any effect accelerated depreciation could have.

According to recent surveys, chief information officers are pegging IT spending to the economy. A Morgan Stanley survey earlier this month showed that 39 percent of CIOs said they would closely monitor the economy to evaluate spending, up from 33 percent in August and 19 percent in July.

The survey also revealed that 31 percent of CIOs are cutting IT spending because of the economy.

In other words, there are no guarantees that accelerated depreciation will help IT spending. Even at that, though, it at least represents a little bit of light at the end of what has been one very long tunnel.

Do you think accelerated depreciation is just what the doctor ordered to shake the tech sector out of its funk? TalkBack to me!

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