Estimated Impact of Improved Cost Recovery Treatment by State

Federal Tax

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.

Table 1. Long-Run Economic Effect of NCRS for Buildings and Structures and Permanent Full Expensing for All Other Assets
 NCRS for 27.5- and 39-Year StructuresFull Expensing for All Other AssetsCombined Effect

Capital Stock (2020 dollars)

7.0% ($2.6 trillion)6% ($2.2 trillion)13.0% ($4.8 trillion)

Full-Time Equivalent Jobs

569,000451,0001.02 million

Source: Tax Foundation General Equilibrium Model, November 2019

Table 2. Job and Capital Stock Growth by State
 Full-Time Equivalent JobsPrivate Capital Stock
 NCRS for StructuresNCRS for Structures + Full Expensing for Other AssetsNCRS for StructuresNCRS for Structures + Full Expensing for Other Assets

Alabama

7,62913,681$28.1$52.0

Alaska

1,3022,334$7.5$13.9

Arizona

10,93819,616$44.6$82.3

Arkansas

4,7148,454$16.6$30.6

California

68,645123,098$387.1$715.1

Colorado

10,95319,641$49.0$90.4

Connecticut

6,59711,830$34.5$63.7

Delaware

1,6883,027$8.8$16.2

District of Columbia

2,5954,654$17.5$32.3

Florida

35,32363,344$131.8$243.5

Georgia

17,78431,892$74.8$138.2

Hawaii

2,6394,733$11.6$21.4

Idaho

2,9445,280$10.1$18.6

Illinois

22,54040,421$108.4$200.3

Indiana

11,24520,166$46.0$85.0

Iowa

5,91810,613$24.1$44.5

Kansas

5,5029,866$21.6$39.9

Kentucky

7,22812,961$26.3$48.5

Louisiana

7,74713,893$33.3$61.6

Maine

2,4054,313$8.1$15.0

Maryland

10,66319,122$51.9$95.9

Massachusetts

13,81224,768$71.9$132.9

Michigan

16,23729,118$65.7$121.4

Minnesota

10,75919,293$47.0$86.8

Mississippi

4,5528,162$14.4$26.7

Missouri

10,71419,213$40.3$74.5

Montana

1,9423,482$6.5$12.1

Nebraska

3,7856,787$15.9$29.4

Nevada

5,2269,372$21.4$39.5

New Hampshire

2,5374,549$10.8$19.9

New Jersey

15,75328,249$78.2$144.4

New Mexico

3,1625,670$13.5$24.9

New York

35,97664,515$202.6$374.3

North Carolina

17,16330,778$70.5$130.3

North Dakota

1,6492,958$7.5$13.9

Ohio

20,10536,053$85.3$157.7

Oklahoma

6,60711,848$27.9$51.6

Oregon

7,32013,126$30.8$57.0

Pennsylvania

22,10439,638$100.9$186.5

Rhode Island

1,8383,295$7.6$14.1

South Carolina

8,05714,448$29.6$54.7

South Dakota

1,7343,109$6.5$12.0

Tennessee

11,67620,939$45.9$84.7

Texas

49,88389,453$248.0$458.1

Utah

5,84210,476$22.8$42.2

Vermont

1,2492,240$4.2$7.8

Virginia

15,09427,068$67.4$124.5

Washington

12,92623,180$73.6$136.1

West Virginia

2,5624,595$10.0$18.5

Wisconsin

10,59118,992$42.4$78.3

Wyoming

1,1482,059$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.

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