States don't have to wait for Congress to act on pro-growth tax reform

States don’t have to wait for Congress to act on pro-growth tax reform

February 20, 2014 | By Steve Slivinski | email

As 2013 drew to an end, so too did a number of key federal income tax provisions. Many of them were related to lightening the tax burden on businesses, and the ripple effects of these expirations could have real consequences throughout the country.

One of the main expiring federal provisions was the end of a simple and powerful tax reform called “instant expensing,” which previously allowed most businesses to write off up to $500,000 of the investment they make in their company for the year in which they make it.

This allowed the average small- and medium-sized businesses to expense all of the new investment they made each year.

For example, an owner of a small business may need to buy or rent office furniture, buy some new computers (or even some used ones), or invest in manufacturing technologies like a 3-D printer. Under current law, you’d have to write off that investment on your taxes over a long period of time – sometimes too long for you to recoup your investment. Under the instant expensing provisions, however, you would make those investments when it most benefited your business. 

Reports across the country have indicated that over the past decade, provisions like instant expensing have led to businesses expanding and hiring more workers. But now that this federal tax law has expired, all businesses in states with expensing provisions tied to the federal tax code have seen it virtually disappear too. Federal lawmakers have yet to renew the now-lapsed provision as they have each year over the past decade, and it’s not clear when – or if – they will.

Luckily, states don’t have to wait for Congress to act. They can simply make this expensing provision – and the economic growth that comes from it – a permanent part of their tax code. All they need to do is embed in state tax law the $500,000 write-off previously prescribed by the IRS. The legislature in Arizona, for instance, is currently considering a tax reform bill that will do exactly that.

Instant expensing has the added advantage of being a tax provision that all businesses can take advantage of, unlike some tax credits that require jumping through government-constructed hoops or still others aimed at subsidizing a favored industry or activity.

This reform is arguably one of the most important supply-side tax reforms that the federal government has enacted since the Reagan administration. Congress isn’t moving to protect those small businesses and workers who benefit. At the moment, it’s up to the states to help safeguard that victory for their residents.

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Steve Slivinski is a senior economist for the Goldwater Institute.

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