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Obama’s Business Expensing Proposal Would Prove Expensive for States

President Obama has proposed a new tax break for business investment.  It’s intended to boost the economy, but it would have the unintended effect of worsening states’ already severe budget problems.  That, in turn, would force states to take steps that would undercut the hoped-for economic stimulus.

In September, the President proposed letting businesses deduct the full cost of machinery and equipment purchases immediately — rather than gradually over several years, as current law generally requires.  This proposal would reduce federal revenues by an estimated $200 billion over the next two years.  It would also reduce state revenues by up to $20 billion, as we explained in a recent report, because most states tie their tax codes to the federal code.  The table below lists each state’s potential revenue loss.

As many as 45 states and the District of Columbia would lose revenues in fiscal years 2011-2013 under the proposal.  The exceptions are Nevada, Texas, Washington, and Wyoming, which have no personal or corporate income tax, and California, which historically hasn’t followed federal rules on deductions for these investments.

States must balance their operating budgets, and they’re already far short of revenue due to the sad state of the economy.  Thanks to weak revenues and an almost certain decline in federal aid to states, projected shortfalls exceed $130 billion for state fiscal year 2012, which starts July 1, 2011 in most states.

If the expensing plan becomes law, states would have to deal with the revenue loss through budget cuts or tax increases — on top of the budget cuts and tax increases they’re already imposing to deal with the large revenue losses caused by the recession.  These additional measures would weaken the proposal’s overall stimulative effect by removing demand from the economy.

Over the next decade, states would recover most of their lost revenue, since businesses that deduct the full cost of their capital investments now would be prevented from deducting that cost in future years.  But that won’t help states now as they face a severe revenue crisis.

Table 1:
State Revenue Loss from Administration Expensing Proposal
State Total Revenue Loss
(in millions of dollars)
State Total Revenue Loss
(in millions of dollars)
Alabama $291 Mississippi $196
Alaska 294 Missouri 261
Arizona 270 Montana 70
Arkansas 256 Nebraska 128
Colorado 308 New Hampshire 231
Connecticut 454 New Jersey 1,398
Delaware 98 New Mexico 55
District of Columbia 203 New York 3,047
Florida 819 North Carolina 942
Georgia 583 North Dakota 52
Hawaii 93 Ohio 291
Idaho 86 Oklahoma 187
Illinois 1,330 Oregon 352
Indiana 422 Pennsylvania 1,113
Iowa 180 Rhode Island 94
Kansas 270 South Carolina 143
Kentucky 297 South Dakota 14
Louisiana 285 Tennessee 418
Maine 130 Utah 193
Maryland 646 Vermont 58
Massachusetts 1,223 Virginia 694
Michigan 523 West Virginia 223
Minnesota 578 Wisconsin 611
Total 20,410