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.
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
Job Creation by State due to
(click to view full size)
William W. Beach is
Director of the Center for Data Analysis at The Heritage