Business Tax Relief Is A Bipartisan Affair In State Capitals

The wave of state tax cuts, particularly individual income tax cuts, has garnered national media coverage and understandably so. Over the past two years, lawmakers in more than 20 states have enacted personal income tax relief and there has been an unprecedented increase in the number of flat income tax states.

While personal income tax cuts have proven to be a popular way for governors and state legislators to return surplus revenue to taxpayers in a way that makes state tax climates more appealing and conducive to investment, corporate tax cuts and other forms of business tax relief have also been approved recently in many states, both blue and red.

Take Tennessee, where media coverage in the final weeks of the state legislative session that concluded in April focused almost exclusively on the protests inside and outside the state capitol in Nashville, along with the expulsion of two legislators and their subsequent reappointment. Yet there was other important business tended to in the final days of session that went mostly ignored by the press. In the penultimate day of session, for example, Tennessee lawmakers enacted reforms that will save employers hundreds of millions of dollars.

The new state budget approved by the General Assembly on April 20 includes the tax relief package that Governor Bill Lee (R) proposed at the start of the year, known as Tennessee Works Tax Act. Though it hasn’t received anywhere near the same level of media coverage as the hysteria surrounding the April state capitol protests, the tax relief enacted by Tennessee legislators in the final week of session will have a more significant, direct, and long-lasting impact on Tennesseans.

Governor Lee’s Tennessee Works Tax Act, enacted as part of the new state budget, provides another example of a low-tax, relatively competitive state where lawmakers are continuing to find ways to improve the tax code by making it less burdensome and more conducive to job creation. Other such examples can be found in the reforms championed this year by Texas Governor Greg Abbott (R) and Florida Governor Ron DeSantis (R).

“To prepare Tennessee for continued growth and prosperity, we’ve made strategic investments to cut taxes, strengthen our workforce, ensure educational opportunity and modernize transportation infrastructure across our state,” Governor Lee said following the General Assembly’s approval of the budget. “I commend the General Assembly for its partnership to pass conservative measures and maintain Tennessee’s reputation for strong fiscal stewardship.”

With the inclusion of the Governor’s tax package, the new state budget approved by Tennessee lawmakers will provide more than $200 million in annual tax relief to Tennessee employers. The budget raises the exemption threshold under which the state business tax is not owed. Justin Owen, president and CEO of the Beacon Center of Tennessee, notes that this one change means that “more than 140,000 small businesses no longer have to pay the state’s business/gross receipts tax, and the top tax rate for other businesses was cut by 37%.”

Owen also touts the passage of legislation that “makes filing personal tangible property tax returns easier on small businesses by streamlining their paperwork, which can often cost more to comply with than they pay in the tax itself.” Other tax relief for employers included in the new state budget is provided through a $50,000 income exemption for the excise tax and a $500,000 property investment exemption for the franchise tax. These changes will remove nearly 70,000 small businesses from franchise and excise tax rolls.

“Tennessee’s franchise and excise tax is one of the most complicated tax forms I’ve ever seen,” says Ryan Ellis, an IRS-enrolled agent and president of the Center for a Free Economy. “I was shocked to see it applied to the smallest of firms. The exemption recently sent to Governor Lee’s desk is good first step. Ultimately the goal should be to get rid of this tax.”

The new Tennessee budget also provides $64 million in annual tax relief for employers by providing bonus depreciation through federal conformity. By conforming with the federal bonus depreciation provisions of 2017 Tax Cuts & Jobs Act, Tennessee-based businesses will be able to immediately write off 80% of capital expenditures this year. Governor Lee proposed this reform as a way to help businesses “more quickly recover costs and further incentivize investment in Tennessee production.”

The new budget’s inclusion of bonus depreciation through federal conformity builds upon the reform enacted by Tennessee lawmakers last year, which allows businesses to deduct research and development-related costs for state tax purposes. Though the federal research and development (R&D) deduction expired at the beginning of 2022, Tennessee was the first state where lawmakers took action to ensure R&D costs can still be deducted for state tax purposes.

Not only have lawmakers in other states since followed Tennessee’s lead by approving state-level R&D cost deduction, they’ve gone further by enacting full capital expensing for state tax purposes.

“The federal tax code is changing each year as parts of the TCJA phase out,” says Michael Lucci, an advisor with Cicero Institute and State Policy Network. “And let’s remember that we live in a new era of geopolitical competition. Full expensing can help incentivize capital investment and reshoring of critical production to the US. States need to actively choose to preserve the good parts of the TCJA in their state tax codes and cancel the bad parts. Tennessee provides a great example on how to navigate these changes to avoid a tax increase on innovation, while Oklahoma has enacted full expensing for machinery and equipment and Mississippi has done it for all short-lived assets.”

While 80% bonus depreciation is better for employers than the status quo of lengthy depreciation schedules, Tennessee lawmakers will need to take further action to prevent state-level bonus depreciation from phasing out in accordance with the Tax Cuts and Jobs Act.

“States are going to have to make sure that fixed date conformity is in the best interest of taxpayers,” says Ellis. “They may need to have different dates for different federal tax items to capture maximum value for state taxpayers. The full expensing phasedown is a good example of this, along with research expensing and other TCJA timing issues.”

Tennessee isn’t the only state where business tax relief has been approved or proposed this year. In New Jersey, Governor Phil Murphy (D) is proposing to allow a 2.5% corporate tax surcharge to sunset. Governor Murphy is taking heat from progressive groups over this proposal, which would allow New Jersey’s corporate tax to fall from 11.5% to 9%.

“We hear from the business community that allowing this surcharge to lapse will mean more money for them to create jobs, to invest in new and more efficient equipment, to lower costs to consumers, and to be able to stay here,” Murphy said in his February budget address.

“We’re such an outlier at 11.5% that we’re literally inviting these companies to take their business elsewhere,” Michele Siekerka, president and CEO of the New Jersey Business and Industry Association, told Politico. “To be an outlier and to continue to remain an outlier kills your competitiveness.”

The Garden State Initiative, a free market think thank that usually doesn’t have many good things to say about Governor Murphy’s positions, released a report in March touting the benefits of lowering or reducing the state corporate tax. The report found “that over a short period of time any revenue loss from the reduction in the tax on New Jersey businesses would be in part or nearly fully offset by the improvement in economic conditions.”

The corporate tax cut enacted in neighboring Pennsylvania last year puts pressure on New Jersey lawmakers to let their corporate tax surcharge expire. Allowing New Jersey’s corporate tax rate to come down will reduce the Keystone State’s newfound corporate tax advantage. The bipartisan reform signed into law last year by then-Governor Tom Wolf (D) will cut Pennsylvania’s corporate income tax in half over time, reducing it from 9.99% to 4.99%. Proving that support for corporate tax relief is bipartisan, Governor Wolf touted the corporate tax cut he enacted during his final year in office as a way to make Pennsylvania “a healthier, more competitive business environment that attracts good-paying jobs and moves our economy forward.”

State corporate tax relief is also pending in Missouri, where the House approved legislation in March to cut the state corporate tax in half, taking the rate from 4% to 2%. That proposal now awaits consideration and action in the Missouri Senate.

Tim Jones, former Speaker of the Missouri House of Representatives, notes that Missouri “is surrounded by eight competitive states, with Illinois being the only exception, who are working hard every legislative cycle to reduce their own income and corporate tax burdens.”

“It is critical to the continued success of the Show-Me State for our General Assembly to recognize this fact and further reduce the tax burden on small businesses and job creators,” adds Jones. “As Missouri has previously reduced our corporate tax burden, our economy and general revenues have grown, proving the positive results of the tax cut correlation.”

While corporate tax relief is being advanced in both blue and red states, legislators in California would like to raise the Golden State’s corporate income tax, which stands at 8.84%. Unfortunately for the California Democrats who are pushing for a higher corporate rate, their proposal was recently shot down by Governor Gavin Newsom (D).

Just as he did with the state wealth tax proposal introduced earlier this year, Governor Newsom has made it clear that should it even make it to his desk, legislation raising the state corporate tax would be dead on arrival. “It would be irresponsible to jeopardize the progress we’ve all made together,” Newsom’s spokesman said in a statement explaining the Governor’s opposition to the proposed corporate tax hike.

While Governor Newsom has thrown cold water on the proposal to raise California’s corporate tax, North Carolina Governor Roy Cooper (D) is seeking to repeal a scheduled corporate tax cut. The state budget signed into law by Governor Cooper in November of 2021, in addition to phasing the personal income tax down to 3.99% by 2026, completely phases out the state’s 2.5% corporate tax by 2030. Even though he signed that budget because of other things it included and because it was clear a veto would’ve likely been overridden, Cooper does not want the corporate tax to go away as is currently scheduled.

The executive budget proposed by Governor Cooper earlier this year would halt the scheduled corporate tax phaseout to facilitate higher levels of state spending. Fortunately for North Carolina employers who are planning for the elimination of that tax, the Republican controlled General Assembly, where the GOP now has supermajorities in both chambers, has no intention of changing the scheduled corporate tax phaseout, which will make North Carolina only the third state with no corporate income tax. In fact, rather than pull back, Republican leadership in both the House and Senate are looking to enact further tax relief.

While it may surprise some to see corporate tax relief gaining traction in both blue and red states, it’s worth noting that it was during the Obama administration that key federal budget scorekeepers adjusted their methodology to account for the effect that corporate taxation has on workers. Prior to those methodology changes, federal models assumed the cost of corporate taxation was borne entirely by the owners of capital. Even the progressive Tax Policy Center now concedes that the burden of corporate taxation is borne, in part, by labor. The main disagreement is now a matter of degree.

Media coverage tends to portray Americans as deeply divided over politics, often for good reason. But the emerging consensus that corporate taxes are borne, in part, by workers and consumers is a new and important area of bipartisan and cross-ideological agreement that deserves more attention. It is certainly one key factor helping to explain why corporate tax relief is now advancing in blue, red, and purple states.