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States Should Take Action to Avoid Billions in Revenue Loss

A federal business tax cut that was part of the tax deal that President Obama and Congress enacted last December could cost states billions in lost tax revenue at a time when they are already struggling with recession-induced budget shortfalls and making deep cuts in education, health care and other key services.  Luckily, there’s a way for states to avoid taking the hit.

Nineteen states stand to lose a total of $5.3 billion dollars, our new report shows, as a result of the tax deal’s “expensing” provision, which allows businesses to immediately deduct from their taxes the full cost of new equipment rather than gradually deducting these costs over several years.  That’s because these states tie their tax codes to the federal code.

However, these states can avoid the revenue loss by “decoupling” their tax codes from the federal code for this particular provision.  Given the deep hole that many states are in (we estimate they face $125 billion in shortfalls for the coming budget year), decoupling can help them avoid even deeper cuts to important services like education and healthcare, which not only hurt quality of life, but also undermine the economic recovery.

In addition to preserving much-needed revenue, decoupling is fairly easy administratively and has little impact on businesses or the state economy.  Businesses will still get the benefit of the deduction at the federal level – a much larger benefit than a state level deduction.  And, if a state conformed to the federal provision, it would be giving a deduction to businesses regardless of whether they bought their equipment in the state.  So a state-level deduction could subsidize purchases made in other states – hardly the best use of state money.

Unfortunately, as the New York Times reported, Pennsylvania doesn’t plan to decouple from the federal provision.  We estimate that will add $833 million to the state’s already sizeable budget shortfall. On a brighter note, Idaho and Virginia have already decoupled, protecting their states from this additional revenue loss.  Other states should be sure to follow their lead.