RALEIGH – A story made the media rounds last week that gave me a chuckle. It suggested that, thanks to a tax break for business included in the new federal stimulus package, North Carolina would “lose” $479 million over three years.
The Charlotte Observer, for example, reported that this revenue “loss” would make it more difficult for Gov. Mike Easley and state legislators to balance the budget (see here). Of course, businesses don’t exist simply to provide money for politicians to play with. It is perverse to treat a major tax cut as bad news in a state like North Carolina where the economic climate clearly needs some major stimulation.
Nor is this, in any reasonable sense, a “loss.” Let’s review some basic math. If taxes go up, most people lose money. If taxes go down, most people gain money. Yes, there are some minor discrepancies – maybe a tax increase will enrich a specific contractor getting state business or help to fund a larger pay raise for a state employee. But basically, with high taxes you lose, with low taxes you gain.
The provision in question would accelerate depreciation for business for the next three tax years. Depreciation is a hideously complicated procedure for estimating the declining value of an asset a business purchases with which to produce a good or service– a building or a piece of machinery, for example. The theory is that, while it is proper to deduct the purchase price of such an item, because it is used to produce a taxable profit, you should stretch the deduction out over the useful life of the asset.
This theory is silly. No government bureaucrat or tax lawyer can guess the useful life of any specific business asset. You can guess at an average life, but this hardly qualifies as a fair way to tax people and doesn’t take into account unforeseen events, such as technological change or monetary inflation, that can knock such guesses wildly off the mark. The best approach would be what is called “expensing.” Businesses (or individuals with self-employment income) would immediately deduct the purchase price of an asset. If it exceeded income, the taxpayer wouldn’t pay tax that year and the difference would carry forward to future tax years as a deduction, too (you might put a reasonable limit on the number of years in order to avoid certain tax-shelter abuses).
At least we should accelerate the depreciation schedules, which is what the new federal law does (although, annoyingly, it makes the change a temporary rather than permanent one). Manufacturers of both the high-tech and low-tech varieties will benefit significantly from this tax-law change, which I must repeat is not a special favor but is a step towards neutrality and fairness.
Indeed, as the Heritage Foundation’s Bill Beach points out in a new paper, even the greedy, grasping hands of the government won’t “lose” as much as they claim due to the supply-side effects of the tax cut. By reducing the tax bias against investment, the federal bill will result in more job creation and higher profits – both taxable events in North Carolina and elsewhere. According to his calculations, the provision will create about 4,400 jobs in North Carolina over the next three years (you can read more here).
Again, a federal tax cut doesn’t cost North Carolinians any money. It saves money that can be put to more productive use than propping up a bloated and wasteful government.