Should Maine Conform to “Bonus Depreciation”?

Should Maine Conform to “Bonus Depreciation”?

February 21, 2008 Posted by J. Scott Moody - No Comments

An article today in the Kennebec Journal debates the merits of coupling with the new federal law changes which includes bonus depreciation. The short answer to the question is: YES, Maine should adopt bonus depreciation. In fact, we should go one step further and enact “immediate expensing.”
Why? Depreciation is an artifact of the tax code that only tax accountants/lawyers could love. From an economic standpoint, depreciation is an unnecessary complication that has no useful economic purpose. In fact, the article makes a untrue comment when it says, “There are different ways to calculate depreciation, but the simplest is to divide the cost of the equipment by its expected life span.” In fact, the best and simplest way to depreciate equipment is through immediate expensing. In other words, a business can write-off, for tax purposes, all investment in the year it was purchased.
Numerous studies have been written about the economic virtues of immediate expensing. Here is a study written by Dr. Arthur Hall on the benefits of expensing to the Kansas economy. Dr. Hall is the Executive Director for the Center for Applied Economics at the University of Kansas. Below is the introduction of his paper–it’s too bad we can not say the same things about Maine’s economy:
“Kansas is on a roll when it comes to good tax policy. One simple, inexpensive step can sustain the momentum and produce a competitive leap in terms of bang for the buck: Permit all businesses to take an immediate income tax write-off for new investments made in Kansas. This step–called “expensing”–would complement the recent competitive reforms related to property and franchise taxation–and further distinguish Kansas as a go-to destination for capital investment, a key driver of high-wage jobs. As a bonus, expensing would make taxes fairer, because it results in equal tax treatment among businesses of all types and sizes.”
“The existence of an income tax makes the Kansas government a de facto silent partner in every Kansas business. In light of this partnership, the appropriate tax policy question is this: Does the government wan to act like a partner that invests in the business or a partner that draws cash out of the business whenever possible?”
“Kansas income tax law, because it operates as an extension of the U.S. income tax law, makes the Kansas government act like a cash-hungry partner rather than an investment-driven partner. Expensing would reverse the situation and turn the government into an investment-driven partner–for the economic benefit of all Kansans.”
And FYI, Dr. Hall’s study was written in a state with a tax burden that is 17.4 percent lower than Maine’s–10.76 percent versus 13.03 percent in FY 2005 (Census Bureau, Bureau of Economic Analysis).