Many States Won’t Follow Full Expensing If GOP Plan Enacted

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Che Odom

Many states may not follow a possible change in the federal tax code affecting large capital purchases of equipment and machinery.

And that could cause administrative headaches for businesses and states.

The Republicans’ proposal to allow businesses to expense capital purchases, for up to five years, and to move away from allowing deductions over a period of years could lead to lower revenue for states that conform to such a change.

As a rule, “states do not like to be tied to timing provisions that immediately impact revenue in a negative way,” Jamie Yesnowitz, principal and state and local tax practice and National Tax Office leader at Grant Thornton LLP, told Bloomberg BNA.

“It is highly likely that a substantial number of states will decouple from that provision,” he said

However, any tax reform that’s enacted at the federal level will reflect a complex set of changes that may expand the base, Nicole Kaeding, economist at the Tax Foundation, told Bloomberg BNA.

In previous instances in which the federal government accelerated depreciation rules without other components, states were hesitant to conform, Kaeding said.

Because the move to full expensing is part of a broader package, that limits the risk for states, she said.

Big Six

The full expensing proposal is just one contained in a tax framework released last week by the Big Six—which includes House Speaker Paul D. Ryan (R-Wis.), Senate Finance Chairman Orrin G. Hatch (R-Utah), Senate Majority Leader Mitch McConnell (R-Ky.), House Ways and Means Chairman Kevin Brady (R-Texas), Treasury Secretary Steven Mnuchin, and National Economic Council Director Gary Cohn.

It would allow businesses to fully and immediately write off capital investments, except for buildings and other structures, for “at least five years.”

The plan also calls for ending most current deductions, sparing the mortgage interest and charitable deductions. This would broaden the base of what’s subject to tax, so in theory, states could maintain their tax rates and see an increase in revenue.

On Sept. 29, President Donald Trump said to a gathering of the National Association of Manufacturers in Washington that expensing was an important part of tax reform.

“It is something people have never seen, and it will be great,” he said, adding that it would lead to job creation.

Partial Expensing

The difference in revenue between allowing expensing on a temporary basis and allowing it permanently could be substantial.

“This type of temporary expensing would make the plan much less expensive, but there’s a downside: it would also deliver much less benefit,” Kyle Pomerleau, the Tax Foundation’s director of federal projects, said.

“We crunched the numbers and found that partial expensing would only boost GDP by 0.78 percent after five years. By the end of a decade, GDP would be only 0.18 percent higher than it otherwise would be,” Pomerleau told Bloomberg BNA in an email Oct. 4, when the Tax Foundation released a paper he wrote about issues related to expensing.

By contrast, permanent full expensing would boost GDP by 4.3 percent, he said.

Increased Complexity

States that decide not to allow full expensing would cause administrative and financial costs on companies, Yesnowitz said.

“As a result of decoupling, I would expect that the administrative complexity currently faced by taxpayers in the area of state tax depreciation calculations will continue, if not increase,” he said.

To contact the reporter on this story: Che Odom in Washington at COdom@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

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