March 13, 2002

March 13, 2002 | WebMemo on Taxes

Depreciation Tax Breaks for Business Means Stronger Revenues forState Governments

Some state governments are concerned that allowing businesses to reduce their taxes by accelerating some of their depreciation will cut deeply into state revenues. This concern is misplaced. Rather than hurt, lower business taxes leads to greater prosperity, which means stronger state revenues.

In the purely static world of revenue accountants, any tax relief cuts government's revenues. But, in the world we actually live in, lower businesses taxes leads to greater economic growth, more jobs, and stronger revenues.

Indeed, Congress's recently enacted economic stimulus legislation will lead to thousands of new jobs all across the country. Additional job growth means stronger sales and state income tax revenues, more income from property tax levies, and healthier revenues from business profits and franchise taxes.

Remember:

  • The 30% depreciation allowance for businesses will create thousands of new jobs, primarily in the first three years. These new jobs will create new income from which new income taxes can be drawn. That means that state revenues from income taxes will rise because there is a larger base of revenue built on these new jobs.
  • Businesses income should also rise, which will strengthen revenues from state profits or franchise taxes. Accelerated depreciation will lower the cost of capital, which should lead to business buying more equipment and expanding their activities. The big beneficiary of higher business activity should be the state sales and use tax.
  • Yet another beneficiary of this pro-growth tax law change is the state budget. Decreasing the cost of capital should lead to lower interest rates. That means that state general obligation and revenue bonds will cost state government less in the future, not more. Of course, anytime state borrowing costs fall, the chances are better that state surpluses will grow. Again, a growing economy supports better, not worse, fiscal performance by state governments. 

Job Creation by State due to Stimulus Legislation
(click to view full size)


William W. Beach is Director of the Center for Data Analysis at The Heritage Foundation.

About the Author

William W. Beach Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis

Related Issues: Taxes