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The 2017 Tax Cuts and Jobs Act (TCJA) provides improved tax treatment of new capital investments in business machinery and equipment. The TCJA allows businesses to deduct investment costs immediately instead of amortizing them over years or decades. Economic models show this tax change is one of the most pro-growth measures of the tax code, and it plays a critical role in raising worker compensation. However, not all states adopted this change into their tax codes.
The State Solution
States can achieve new business investment and economic growth by conforming with section 168(k) of the Internal Revenue Code, which provides for the full and immediate expensing of new investments in machinery and equipment. States that adopt this measure into their tax code have experienced a 2.5 percent increase in compensation per employee in manufacturing compared to states that did not.
Why This Matters
New investment is a critical ingredient to overcoming the economic damage of the coronavirus pandemic. Investment drives both economic recovery and business hiring—two key objectives for recovering from the current economic recession. The state tax code should not stand in the way of economic success in our communities.
States Currently Implementing This Solution
19 states shown in blue and purple below, currently conform with the CARES Act and 168(k) expensing. They provide “full expensing” for new business investments in machinery and equipment, which are essential for a robust economic recovery.
What States Should Do Next
The remaining states should enact legislation to conform with section 168(k) of the federal Internal Revenue Code, which is one of the most pro-growth elements of the federal tax code. Doing so will pave the way for the benefits and fair treatment for new investments in their state, unlocking stronger investment and wage growth in the process.
- Fiscal Fact: GILTI and Other Conformity Issues Still Loom for States (Tax Foundation)
- Analysis: Why Neutral Cost Recovery Is Good for Workers (Tax Foundation)
- Resource: Reviewing the Benefits of Full Expensing for the Post-Pandemic Economic Recovery (Tax Foundation)
Think tanks should work with a legislator to request legislation that makes the state tax code conform with section 168(k) expensing.