States Can Avert New Revenue Loss by Decoupling From Federal Expensing Provision

New Research from the Center on Budget and Policy Priorities:

A recent change in federal tax law regarding business investment in machinery and equipment could be very costly for many states — at a time when they can least afford it.  Nineteen states are on track to lose $5.3 billion in state corporate and individual income tax revenues during the current and next two state fiscal years:  some will lose revenue unless their legislatures act to prevent it, while others will lose revenue if they follow their previous practice of altering their tax codes to conform to such federal changes.  Another 26 states and the District of Columbia could lose $10.1 billion in state revenue if they break from their previous practice and conform to the federal change. 

These losses would come on top of states’ record revenue losses resulting from the economic downturn, which are creating budget shortfalls of unprecedented size.  Fortunately, states can protect themselves from these revenue losses by “decoupling” the relevant part of their tax codes from the federal change.

The federal change, part of the tax-cut compromise legislation enacted in December, allows  businesses to immediately deduct from their federal gross income the entire cost of capital investments in machinery and equipment — a practice known as “expensing” — rather than gradually deducting or “depreciating” these costs over several years.  The deduction applies to purchases made from September 8, 2010 to December 31, 2011.  (For purchases in calendar year 2012, businesses can deduct 50 percent of the cost of capital investments and then apply the regular depreciation schedule to the remaining value of the equipment.)  The new law extends and doubles the size of an existing provision of law that allowed 50 percent depreciation — so-called “bonus depreciation” — in 2008-2010 and was supposed to expire at the end of 2010.

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