Mississippi advances full expensing through both chambers
Mississippi lawmakers advanced legislation to enact full expensing this week, with separate bills passing in the legislature’s House and Senate.
H.B. 1733 passed Mississippi’s House on an overwhelming 112-3 vote, while S.B. 3101 passed the Senate on a 51-0 vote. The bills both make full expensing the permanent tax treatment for qualifying investments in both research and experimentation and machinery and equipment in Mississippi. This important change will help attract more investments to the Magnolia State.
Nebraska lawmakers have an opportunity to match Mississippi’s move, and become one of the first states to make full expensing law. LB 492, introduced by Senator Brad von Gillern, would make full expensing Nebraska’s permanent, pro-growth tax treatment for new investments in research and experimentation and machinery and equipment within Nebraska.
Full expensing, or 100% bonus depreciation, is an important way to allow businesses to write off the cost of certain capital investments. For example, when a manufacturer buys a piece of equipment for his plant, the cost of this piece of equipment is deductible against his business income. This makes sense, because income is the difference between revenues and costs, and so business costs should always be deducted against income.
Full expensing addresses when the manufacturing business gets to deduct the cost of the newly-purchased machinery against business income. For example, a state’s tax law might allow the business to depreciate the machine’s cost over 5 years, 10 years, or even 20 years. Full expensing gives the simplest and most fair treatment for the timing of this deduction. If the question is when the business can take the deduction, full expensing makes the answer right now.
It is important to allow businesses to deduct such costs immediately so that they can recognize and recover the full cost of their investments. Consider the difference in an extreme case. Suppose a major Nebraska manufacturing company purchased $5 million of qualifying machinery and equipment that has a depreciation life of 20 years. Without bonus depreciation, the company would take a $250,000 deduction per year over 20 years to fully recover the cost of the $5 million investment.
The reality is that a $250,000 business deduction in 2043 is far less valuable than a $250,000 business deduction in 2023. That is because the $250,000 deduction loses value over time due to inflation and other costs associated with the time value of money. In fact, deductions in the future rapidly lose value when inflation is running high, and current inflation is still over 6%.
Without full expensing, businesses are taxed for income that is in excess of actual income on a cash-flow basis. In other words, when businesses aren’t able to recognize the full value of their costs, they end up being taxed on income that doesn’t exist.
Fortunately, Nebraska law provided for full expensing through the end of 2022 as a consequence of adopting the policy from the federal tax code. However, the federal tax code is changing, and so Nebraska is losing full expensing as the policy phases out of the federal tax code. Making full expensing permanent in Nebraska, as Senator von Gillern’s LB 492 would do, will cost the state no new revenue because von Gillern’s proposal would simply continue the favorable tax treatment that existed prior to January 1, 2023. In fact, letting full expensing lapse would run counter to other legislative initiatives to reduce business income taxes.
Nebraska should provide favorable treatment to new capital expenditures into the state. While multi-national businesses re-shore and friend-shore their supply chains, states can welcome new investments by providing fair tax treatment with full and immediate cost recovery.