Legislative Testimony: LB827, Provide income tax deductions for the cost of certain property and for certain research or experimental expenditures

Chairwoman Linehan and Members of the Revenue Committee, my name is Nicole Fox, Director of Government Relations at the Platte Institute, and I am here to testify today in strong SUPPORT of Sen. Lindstrom’s LB827. I want to thank Sen. Lindstrom for introducing this bill to provide Nebraska one more tool in the toolbox to help attract and retain businesses.

Current Law

Section 174 – Federal tax law has treated research and experimental (R&E) costs as fully and immediately deductible since 1954. When the 2017 Tax Cuts and Jobs Act (TCJA) was passed, it included two pay-for provisions. The first provision ended the full expensing of research and experimentation costs in the year they are incurred effective January 1, 2022. Moving forward, R&E costs will need to be amortized over 5 years for domestic R&E costs. States automatically conform to Section 174 of the Internal Revenue Code (IRC).

Section 168 – The TCJA eliminated the “factory tax” by creating full expensing and immediate cost recovery for business property with an asset life of 20 years or less. This includes machinery and equipment, but also include short-lived assets such as qualified improvement property like new roofs, heating systems, and computer software. As a second TCJA pay-for, federal tax law will revert to amortizing these costs beginning January 1, 2023. Like Section 174, states automatically conform to Section 168 of the IRC.

Proposed Decoupling

If Nebraska remains conformed to these two provisions, these federal tax changes will ultimately result in a tax increase for businesses that invest in either R&E or invest in new machinery and equipment or short-lived assets.

LB827 proposes to decouple Nebraska from provisions of the 2017 Tax Cuts and Jobs Act dealing with business investment costs. Section 174 which applies to expenses related to research and experimentation, and section 168 which applies to expenses related to machinery, equipment, and short-lived assets.

Under LB827, companies will have a choice whether to follow federal amortization or to fully expense machinery, equipment, and research in the tax year they were incurred. Having the option to continue to fully expense helps businesses in our state avoid a tax increase on these investments.

Full expensing of business investments in the tax year they are incurred is a pro-growth dollar-for-dollar tax reform. It benefits businesses by providing them the opportunity to reinvest in more modernized technology, to expand production capacity, and to invest in their workforce.

The provisions of LB827 serve as one tool to help make Nebraska more economically competitive and incentivizes investment in our state. Michigan and Tennessee are also introducing proposals in their legislatures like LB827.

On behalf of the Platte Institute, I urge your strong consideration of Sen. Lindstrom’s proposal and its advancement out of committee.