Full Expensing for Nebraska in 2024
Full expensing is the ideal tax policy to help Nebraska catalyze economic growth, attract capital investment, and re-shore supply chains in 2024.
Full expensing allows a business to write off the cost of new investment immediately rather than spreading out investment cost recovery over as long as 20 years. It is a subtle change that makes a big impact.
Suppose a large manufacturer invests $5 million in machinery and equipment in Nebraska. Under a full expensing regime, the manufacturer could immediately deduct the $5 million investment cost against taxable income. By comparison, without full expensing and under “straight-line” depreciation, the $5 million cost could be deducted against taxable income by taking a $500,000 deduction each year for 10 years.
As far as tax cuts go, full expensing is likely the pound-for-pound champion in economic growth generated per dollar of foregone tax revenue. The numbers prove this out. Economic modeling by the Tax Foundation shows that full expensing generates twice as much economic growth per dollar of tax reduction as cutting the corporate income tax rate. That’s because full expensing provides tax relief immediately and exclusively for new capital investments, therefore encouraging investment and new growth.
Reducing corporate income tax rates is an essential economic development tool, and one that Nebraska achieved by reducing its corporate rate to 3.99% in LB 754, signed by Governor Pillen in May 2023. Nebraska’s 2023 corporate rate cut would be well-complemented by a 2024 policy of full expensing.
Full expensing tax example
The tax benefit of full expensing is more nuanced but also more growth-generating than a straight-forward corporate rate cut.
A large manufacturer with $10 million of Nebraska income would pay $725,000 in state taxes under Nebraska’s previous 7.25% corporate tax. Nebraska’s new 3.99% tax rate means the same business would pay only $399,000 in annual taxes, reducing the company’s tax burden by $326,000. This increases the incentive to invest in Nebraska by improving the expected return on investment, and it creates tax savings the business can use for reinvestment.
In order to create more shareholder value, the business could reinvest this annual tax savings in new workers, plant, machinery and equipment. Or, if high-return investments were unavailable, the business might return the new cashflow directly to shareholders in the form of dividends and share buybacks. The corporate tax cut creates these options, thereby enhancing the incentive to reinvest and boosting economic growth.
Now consider the large Nebraska manufacturing business with $10 million income per year. If this business invests $5 million in machinery and equipment in Nebraska with full expensing, the business’ taxable income would be reduced from $10 million to $5 million in the year of the investment, saving $200,000 in taxes under a 4% rate. Without full expensing and under a straight-line depreciation schedule, if the same business invested $5 million in machinery and equipment it would have its $10 million in taxable income reduced to $9.5 million, and would similarly receive a $500,000 deduction each year for 10 years. So instead of saving $200,000 in taxes in the first year under full expensing, the business would save $20,000 in taxes every year for 10 years.
Thus, allowing full cost recovery not only incentivizes new investments, it allows a business to reinvest more quickly.
Fiscal cost
There are two factors to consider in calculating the cost of full expensing in Nebraska. First, full expensing under federal section 168 is currently phasing out of federal law, which Nebraska adopts. Therefore, the annual fiscal cost of enacting full expensing at the state level goes up each year in comparison to staying coupled to federal law. On the other hand, Nebraska’s corporate tax rate will fall each year until 2027, which reduces the cost of full expensing.
Full expensing is also known as 100% bonus depreciation, which means a business can write off 100% of the cost of an investment immediately instead of writing it off over 10-20 years. 100% bonus depreciation is phasing down in federal law as follows:
2018-2022: 100% bonus
2023: 80% bonus
2024: 60% bonus
2025: 40% bonus
2026: 20% bonus
2027: 0% bonus
Nebraska will follow federal law unless the state decouples from federal law to restore 100% bonus depreciation.
As an aside, section 179 of the federal code provides full expensing for the first $1 million of capital investments per year for small businesses. This full expensing provision will not phase out of federal law, but it is only provided for the first $1 million of investments and begins to phase out when a business exceeds $2.5 million of new investments in a year.
Suppose full expensing reduces state corporate tax revenues by 8%. If that is the case, then full expensing would cost Nebraska roughly $50 million per year under November revenue projections. However, Nebraska allowed for 80% bonus depreciation in 2023 and 60% bonus depreciation in 2024 because it adopts the federal tax treatment of capital expenditures. So would only incur part of the total cost on providing full expensing in 2024 because it’s already providing 60% bonus depreciation. Thus, the cost of full expensing goes up each year compared with remaining conformed to the federal bonus depreciation schedule.
On the other hand, the cost of full expensing should decline as Nebraska’s corporate rate falls. The fiscal projections for full expensing calculated in the spring of 2023 should presumably be reduced under Nebraska’s new corporate rate regime. The cost of full expensing should fall proportionately to the reduction in the corporate rate. For example, full expensing in 2027 with a 3.99% corporate rate should have a 32% lower fiscal cost than full expensing under a 5.84% corporate rate.
| Tax year | Top corporate tax rate (LB 873) | Top corporate tax rate (LB 754) | Change in full expensing fiscal note | Old fiscal estimate | Adjusted fiscal estimate |
| 2022 | 7.50% | 7.50% | 0.0% | N/A | |
| 2023 | 7.25% | 7.25% | 0.0% | N/A | |
| 2024 | 6.50% | 5.84% | -10.2% | $ 45,430 | $ 40,817 |
| 2025 | 6.24% | 5.20% | -16.7% | $ 50,064 | $ 41,720 |
| 2026 | 6.00% | 4.55% | -24.2% | $ 43,839 | $ 33,245 |
| 2027 | 5.84% | 3.99% | -31.7% | $ 42,631 | $ 29,126 |
| 2028 | 5.84% | 3.99% | -31.7% | $ 45,046 | $ 30,776 |
Enacting full expensing in 2024 would be less costly than in 2023 because the lower corporate rate means full expensing will result in less foregone revenue.
Credit consolidation
Another tool to help finance full expensing is to consolidate some of Nebraska’s tax credit programs. Tax credits have been used as a tool to offset Nebraska’s uncompetitive corporate taxation. However, with Nebraska’s corporate rate failing to a competitive 3.99% rate, the need for corporate credits is reduced.
Corporate tax credits are often associated with an economic activity that policymakers wish to create, such as investment and job creation. However, corporate credits often go to companies that were planning such activities anyway.
Full expensing, in contrast, provides tax relief for bona fide new investments in physical capital. The entire tax benefit is based upon new capital expenditures and is distributed to all companies in a fair, neutral way.
Thus, one way to finance full expensing is to trim other corporate tax credits to provide more the effective tax relief of full expensing.
Economic Impact
Full expensing is one of the most effective tax measures for increasing capital investments and economic growth. Without full expensing, businesses are prevented from deducting the full cost of their investments. Enacting full expensing arguably produces the best economic impact per dollar of tax relief.
Researchers find significant economic impact from enacting full expensing, and the impact is especially noticeable between states that do and don’t adopt full expensing. Below are research examples that prove out the impact of full expensing.
- Tax Foundation researchers found that full expensing produces twice the economic growth as an equivalent cut to the corporate tax rate
- Georgetown researchers found that state full expensing boosts business capital expenditures by 21.5% and wages by 5%.
- Penn Wharton researchers similarly found that state full expensing boosts in-state manufacturing employment by nearly 10%.
- And finally, Tax Foundation modeled that federal full expensing would boost GDP by 2.3% and America’s capital stock by 6%.
Full expensing is one of the most important reforms Nebraska can make in 2024. Lawmakers should prioritize ensuring there is sufficient fiscal space to allow the moderate tax reduction that full expensing would entail in order to reap the significant economic benefits of the tax policy. As industries increasingly look to re-shore supply chains to the United States, they will consider which states provide the best tax treatment for new investments. With an increasingly competitive tax code and a new policy of full expensing, Nebraska can put itself at the front of the line for new investments.