Oklahoma Becomes First State in Nation to Make Full Expensing Permanent

Taxes

Oklahoma lawmakers and Gov. Kevin Stitt (R) are at a standstill on efforts to secure tax reform in special session, but lawmakers did accomplish something important in the waning days of the state’s regular session—a national first for which the Sooner State deserves substantial credit. Full expensing—or the immediate write-off of all business investment—is now permanently enshrined in the state’s tax code and will remain in force even after the related federal provisions begin to sunset in 2023.

Gov. Stitt signed HB 3418 into law on May 26, a pro-growth action that will set the state apart from its peers. Other states should look to follow Oklahoma’s example and make full expensing permanent to maintain their competitiveness in an increasingly mobile economy.

Oklahoma’s new statute retains the definitions used in Section 168 and Section 179 of the Internal Revenue Code (I.R.C.), but the language specifies that businesses will permanently be able to deduct 100 percent of qualified property in the year costs are incurred or the property is placed in service, even if the federal government allows the expensing percentages to be reduced or even phased out entirely.

Eighteen states currently allow full expensing of all business investment, following the federal treatment, while the rest require businesses to deduct capital expenses in accordance with preset depreciation schedules. In other words, instead of immediately deducting capital expenses in the year the investment occurred, it could take a number of years before those remaining states acknowledge the full cost of an investment to a firm.

Generally, when businesses calculate their income for tax purposes, they subtract businesses costs. This is fitting, as the corporate income tax is meant to be a tax on business profits—in general, revenues minus costs. Requiring these deductions to be spread out over a number of years changes the nature of the tax. Due to inflation and the time value of money, a dollar in the future is always worth less than a dollar today. Delaying deductions for the cost of business investments means that the real value of the deductions will always be less than the original cost.

Ultimately, this treatment makes the corporate income tax biased against investment in capital assets, as other business expenses (e.g., labor, advertising, and supplies) can be written off in the first year. This is especially harmful to businesses in capital-intensive industries like manufacturing. With changes in demand—both in quantity demanded and what’s being demanded—and the current supply chain crisis, tax policies that make it more expensive to retool or build out manufacturing capacity are particularly undesirable now.

By way of contrast, the immediate deduction of all business investment is a key driver of future economic growth, and can have a larger pro-growth effect per dollar of revenue forgone than cutting tax rates. Full expensing boosts long-run productivity, economic output, and incomes, because investments that were not profitable under long-term depreciation rules become profitable under full expensing. States with stingy expensing provisions are less attractive for in-state investment than those offering full expensing, all else being equal.

The 18 states that conform to federal treatment of capital investment have given themselves a valuable tool for building a thriving state economy. However, this competitive advantage begins to erode in 2023, with the federal phaseout of full expensing and its eventual sunset. States should follow Oklahoma’s example by keeping this pro-growth policy on the books permanently.

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