Guest Opinion
Depreciation deduction digs a bigger hole
By Peter S. Fisher, Research Director

As published in the March 13, 2011, Gazette, Cedar Rapids

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The recession clearly put a hole in state revenues. But the Iowa Legislature is ignoring the adage: If you find yourself in a hole, stop digging. Instead, lawmakers seem intent on making the hole deeper, before they have even tackled the challenge of how to keep state services running.

Revenues this year are about 6 percent above last year’s as the state climbs out of the recession. But because of rising costs, the state is projected to be about $75 million short of being able to maintain the current level of services next year. This is not a bad position to be in; we have routinely dealt with larger shortfalls in the past. But the Iowa House and Senate have passed tax measures that would add hundreds of millions of dollars to the shortage.

The latest such measure is so-called “bonus depreciation.” The House and Senate bills would adopt for Iowa new federal rules that allow a company to deduct all of the cost of new capital equipment immediately rather than spread the cost over several years through depreciation deductions. The only rationale for such a rule is to provide an incentive for firms to invest in Iowa now, because this favorable deduction is cut in half at the end of this year and then expires in 2012.

There are two big problems with this argument.

First, the new investment need not take place in Iowa; much of the cost to Iowa taxpayers would be for investment in other states.

Second, the House version is retroactive to 2010, and about 44 percent of the cost would be for investments already made. It’s like saying “We need more future investment in Iowa, so we’ll give you a tax break if you promise that you invested last year, somewhere.”

In the long run, the state treasury would recover most (perhaps 80 percent) of the revenue lost this year and next. (This is because companies will not have the depreciation to deduct in future years and so will pay higher taxes then.)

But now is when we need the money to maintain our schools and roads, and keep our firefighters and police on the job. Instead, this break hands $224 million mostly to large multistate corporations, mostly for investment they would have undertaken anyway — or have already completed — somewhere other than Iowa. What are legislators thinking?

Will failure to conform with federal rules complicate things for business? Not in this age of computerized accounting; state law will automatically be incorporated into tax preparation software.

Some will tout the bill as a help to “small business.” In fact, the businesses most of us think of as small will get no benefit at all; bonus depreciation provides no added benefit unless your business makes more than $500,000 in capital investment and earns more than $500,000 in profits.

The governor, in his budget, did not include bonus depreciation, following the recommendation of the Iowa Department of Revenue. He did, however, propose cutting the corporate income tax rate in half. Again, the vast majority of the benefits would go to the largest corporations. For most small businesses, it offers no benefit whatsoever. And the measure is not needed: Iowa in recent years ranked 40th in our effective corporate income tax rate; only 10 states tax corporations more lightly.

Our elected officials are not respecting the priorities of Iowans. Instead, they seem bent on providing tax cuts for those least in need of them, and layoffs and service cuts for the rest of us.

Peter S. Fisher is research director of the non-partisan Iowa Policy Project in Iowa City. IPP is part of the Iowa Fiscal Partnership, Comments: