Tax Policy – Estimated Impact of Improved Cost Recovery Treatment by State
Removing the tax code’s bias against long-term investment by implementing a neutral cost recovery system (NCRS) for structures and full expensing for other assets is estimated to increase economic growth and job creation. Using the Tax Foundation General Equilibrium Model, we estimate that permanent full expensing and neutral cost recovery for structures will add more than 1 million full-time equivalent jobs to the long-run economy and boost the long-run capital stock by 13 percent, or $4.8 trillion.
To illustrate the potential impact that these policy changes could have on job and capital stock growth, the Tax Foundation has launched a new interactive map that allows users to explore the effects of improved cost recovery treatment by state.
Improving capital cost recovery will be crucial for the recovery effort from the public health crisis to increase investment and job growth. Under the U.S. tax code, companies can generally deduct their ordinary business costs when figuring their income for tax purposes. However, this is not always the case for the costs of capital investments, such as when businesses purchase buildings, factories, or warehouses. Typically, when businesses incur these sorts of costs, they must deduct them over several years according to preset depreciation schedules, instead of deducting them immediately in the year the investment occurs.
Delaying deductions means the present value of the write-offs (adjusted for inflation and the time value of money) is less than the original cost, preventing companies from fully deducting the cost of their investments in real terms. Denying full deductions for these costs in turn overstates profits and increases the after-tax cost of making investments, leading to a lower level of investment and economic growth.
Using the Tax Foundation General Equilibrium Model, we estimate the effect of improving the cost recovery of all types of investments by implementing a NCRS system for 27.5-year and 39-year structures and full expensing for all other assets. We find that these two policies together would increase the capital stock by 13.0 percent and full-time equivalent employment by 1.02 million jobs.
| NCRS for 27.5- and 39-Year Structures | Full Expensing for All Other Assets | Combined Effect | |
|---|---|---|---|
|
Capital Stock (2020 dollars) |
7.0% ($2.6 trillion) | 6% ($2.2 trillion) | 13.0% ($4.8 trillion) |
|
Full-Time Equivalent Jobs |
569,000 | 451,000 | 1.02 million |
|
Source: Tax Foundation General Equilibrium Model, November 2019 |
|||
| Full-Time Equivalent Jobs | Private Capital Stock | |||
|---|---|---|---|---|
| NCRS for Structures | NCRS for Structures + Full Expensing for Other Assets | NCRS for Structures | NCRS for Structures + Full Expensing for Other Assets | |
|
Alabama |
7,629 | 13,681 | $28.1 | $52.0 |
|
Alaska |
1,302 | 2,334 | $7.5 | $13.9 |
|
Arizona |
10,938 | 19,616 | $44.6 | $82.3 |
|
Arkansas |
4,714 | 8,454 | $16.6 | $30.6 |
|
California |
68,645 | 123,098 | $387.1 | $715.1 |
|
Colorado |
10,953 | 19,641 | $49.0 | $90.4 |
|
Connecticut |
6,597 | 11,830 | $34.5 | $63.7 |
|
Delaware |
1,688 | 3,027 | $8.8 | $16.2 |
|
District of Columbia |
2,595 | 4,654 | $17.5 | $32.3 |
|
Florida |
35,323 | 63,344 | $131.8 | $243.5 |
|
Georgia |
17,784 | 31,892 | $74.8 | $138.2 |
|
Hawaii |
2,639 | 4,733 | $11.6 | $21.4 |
|
Idaho |
2,944 | 5,280 | $10.1 | $18.6 |
|
Illinois |
22,540 | 40,421 | $108.4 | $200.3 |
|
Indiana |
11,245 | 20,166 | $46.0 | $85.0 |
|
Iowa |
5,918 | 10,613 | $24.1 | $44.5 |
|
Kansas |
5,502 | 9,866 | $21.6 | $39.9 |
|
Kentucky |
7,228 | 12,961 | $26.3 | $48.5 |
|
Louisiana |
7,747 | 13,893 | $33.3 | $61.6 |
|
Maine |
2,405 | 4,313 | $8.1 | $15.0 |
|
Maryland |
10,663 | 19,122 | $51.9 | $95.9 |
|
Massachusetts |
13,812 | 24,768 | $71.9 | $132.9 |
|
Michigan |
16,237 | 29,118 | $65.7 | $121.4 |
|
Minnesota |
10,759 | 19,293 | $47.0 | $86.8 |
|
Mississippi |
4,552 | 8,162 | $14.4 | $26.7 |
|
Missouri |
10,714 | 19,213 | $40.3 | $74.5 |
|
Montana |
1,942 | 3,482 | $6.5 | $12.1 |
|
Nebraska |
3,785 | 6,787 | $15.9 | $29.4 |
|
Nevada |
5,226 | 9,372 | $21.4 | $39.5 |
|
New Hampshire |
2,537 | 4,549 | $10.8 | $19.9 |
|
New Jersey |
15,753 | 28,249 | $78.2 | $144.4 |
|
New Mexico |
3,162 | 5,670 | $13.5 | $24.9 |
|
New York |
35,976 | 64,515 | $202.6 | $374.3 |
|
North Carolina |
17,163 | 30,778 | $70.5 | $130.3 |
|
North Dakota |
1,649 | 2,958 | $7.5 | $13.9 |
|
Ohio |
20,105 | 36,053 | $85.3 | $157.7 |
|
Oklahoma |
6,607 | 11,848 | $27.9 | $51.6 |
|
Oregon |
7,320 | 13,126 | $30.8 | $57.0 |
|
Pennsylvania |
22,104 | 39,638 | $100.9 | $186.5 |
|
Rhode Island |
1,838 | 3,295 | $7.6 | $14.1 |
|
South Carolina |
8,057 | 14,448 | $29.6 | $54.7 |
|
South Dakota |
1,734 | 3,109 | $6.5 | $12.0 |
|
Tennessee |
11,676 | 20,939 | $45.9 | $84.7 |
|
Texas |
49,883 | 89,453 | $248.0 | $458.1 |
|
Utah |
5,842 | 10,476 | $22.8 | $42.2 |
|
Vermont |
1,249 | 2,240 | $4.2 | $7.8 |
|
Virginia |
15,094 | 27,068 | $67.4 | $124.5 |
|
Washington |
12,926 | 23,180 | $73.6 | $136.1 |
|
West Virginia |
2,562 | 4,595 | $10.0 | $18.5 |
|
Wisconsin |
10,591 | 18,992 | $42.4 | $78.3 |
|
Wyoming |
1,148 | 2,059 | $5.4 | $10.1 |
|
Source: Tax Foundation General Equilibrium Model, November 2019, and author’s calculations. |
||||
Estimated new full-time equivalent jobs by state were allocated based on each state’s share of total employment in 2018 from the Bureau of Economic Analysis. Estimated capital stock increases were allocated based on each state’s share of GDP in 2018 from the Bureau of Economic Analysis.
Source: Tax Policy – Estimated Impact of Improved Cost Recovery Treatment by State
Upstate Tax Professionals