A Tax Cut with No Revenue Loss – and More Jobs
Would you believe we can cut taxes in a way that will create more jobs and boost our economy – with no long-term loss of revenue to the state?
Normally, when a business buys office supplies, or raw materials for making products, or any other tangible item that will be used up in a short amount of time, the business can deduct that from its income before calculating its taxes. Because these are some of the expenses of running a business, taking a tax deduction for these items is often referred to as “expensing.”
However, when a business buys a vehicle for making deliveries, for example, or buys a machine or other equipment that will last for a while, it can normally only deduct, or “expense,” a portion of that cost each year over the anticipated life of that asset. The delivery vehicle, for instance, would be expensed over five years. (This is similar to depreciation, but there are some differences. For simplicity, I’m combining the two, only using the term “expensing,” since the effect of what I’m about to describe is essentially the same for both.)
The federal Tax Cuts and Jobs Act, passed in late 2017, temporarily made it possible for businesses to fully expense those longer-term assets in the year they were put into service, rather than doing so over time. Beginning this year, major portions of that law will be phased out over five years.
Mississippi could and should set itself apart by making full and immediate expensing a permanent part of our state tax code in spite of the federal phase-out.
How would this benefit Mississippi’s economy? It would incentivize and enable companies to invest more quickly in growing their capacity, which leads to employing more people, which leads to economic development without government grants and subsidies.
Contrary to popular belief, business investment is the way an economy grows, not stimulus payments, which is the usual tool of politicians because it’s immediately visible.
When business owners invest in their companies, no matter how big or small the business, they build their capacity to make more stuff or provide more services. This creates more jobs and more investment in their local communities. And it just happens to generate more tax revenue, from themselves and from their employees, due to increased sales.
In short, you can choose more debt for taxpayers for a fleeting economic burp, or you can choose more jobs and a growing economy – and more tax revenue – with no taxpayer subsidies.
One beauty of this proposal is that it can benefit all businesses, no matter the size, and no matter the tax structure. It’s not just for the special interests, large corporations, or industries with powerful lobbyists. Whether the business is incorporated and pays corporate income tax, or whether it’s an LLC or S Corporation or sole proprietor mom-and-pop where the owners pay personal income tax on business profits, full expensing for business investment benefits them all.
Oh, and how is this not a loss of revenue to the state? Won’t a tax deduction “cost” the state money? In short, no.
Full expensing doesn’t increase the deduction a business can claim. It simply adjusts the timing. Instead of taking the deduction over several years, it would be taken in one year. That means the business will not be taking the deduction next year or the next or the next, which means it will pay more taxes in those years than it would under the normal multi-year expensing process. So, by definition, whatever “cost” the state might incur in the first year an investment is expensed will be replaced over the next few years.
Of course, as mentioned above, the investments encouraged by this change should produce even more tax revenue as payroll and profits grow due to expanded capacity.
So far, only Oklahoma has made full expensing permanent in its state tax code. This is a chance for Mississippi to get ahead of the game, encourage businesses that are here to grow now, and benefit our people and our communities for years to come. And as more companies look to bring manufacturing and related supply-chain components back to America, this proposal could encourage them to choose Mississippi, with our favorable tax climate, as the place to locate.
Whether the legislature passes this as a stand-alone bill or combines it with other tax relief, now is the time, this is the year. This needs to be done.