Since 2001, the federal tax code allowed business owners to write off more of the investment they make in their company each year and, today, businesses can write off 100 percent of the capital investments they made this year. But if Congress and the President don’t act, that tax cut will end in January 2012. State policymakers, on the other hand, could offer a little certainty in their state income tax code by allowing businesses to immediately write-off on their taxes the full value of their new capital investments.
To understand why and how they should act, first you need to know what happens when a business owner makes a capital investment in his operation. Let’s say he buys a productivity-enhancing machine -- a computer, a copy-machine, or a large widget-making device. When purchased and put into service, the IRS allows only a small portion of that investment to be written off in the first year. Instead of writing off the full cost all at once, the business would have to take a number of smaller deductions each year over the usable life of the machine as it declines, or “depreciates,” in value.
This isn’t particularly helpful for economic growth and productivity. Not allowing businesses to immediately write-off the amount of the purchase forces them to understate the true cost of doing business that first year and pay more in taxes as a consequence. Factor in mild inflation and it could even result in the business never being able to fully deduct the business expense over the long term. This dampens investment today and that dampening effect negatively influences job and wage growth.
A simple change could lock this year’s 100-percent deduction into a state’s tax code forever. Short of eliminating the income tax, this would be a great way to maximize a state government’s ability to create a bit of economic certainty for businesses.
It would also counter most state’s tax bias against investment. Kansas governor Sam Brownback realized this was a problem in his state and one of his big, successful legislative pushes this year was enactment of just such a reform. The Sunflower State is, in fact, the only state with an income tax tied to the federal tax code to have cemented 100 percent expensing in their state, which will give them quite an economic advantage.
This would be an effective way to increase long-term business investment in any state with an income tax. State policymakers shouldn’t miss this golden opportunity to give the gift of some tax certainty as soon as they can. It truly can be a gift that keeps on giving.
Stephen Slivinski is senior economist for the Goldwater Institute.
Institute for Research on the Economics of Taxation: Administration Advocates Expensing: One Big Plus (Among the Minuses)
University of Kansas Center for Applied Economics: Expensing: A Competitive Leap for Kansas Tax Policy (September 2007)
BKD CPAs and Advisors: New Kansas Laws Include Expensing Provision, Incentive Repeal