Mississippi’s New Tax Model Can Work for America

I n a rare feat of bipartisan tax reform, Mississippi lawmakers have begun addressing the pressing needs of the post-pandemic economy. On March 27, Governor Tate Reeves signed H.B. 1733 into law after it cleared both legislative chambers unanimously. Sponsored by Representative Trey Lamar and Senator Chris Johnson, the new law creates full expensing for capital investments in research, experimentation, machinery, and equipment in the Magnolia State.

Other state legislatures and Congress should take notes. Full expensing addresses two problems facing the post-pandemic American economy: the need to re-shore critical supply chains and the need to protect business capital investments from the ruinous effects of inflation. Regardless of political affiliation, people concerned about securing America’s vital supply chains and leading in the global economy should support the implementation of full expensing in both state and federal law. The members of Mississippi’s house and senate certainly understood this, voting 111–0 and 52–0 in favor of the law, respectively.

Full expensing enables businesses to immediately deduct the entire cost of capital expenditures from taxable income, rather than spreading out those deductions over years or decades. This simple change unlocks surprising investment and growth. Georgetown researchers found that full expensing boosts business capital expenditures by 21.5 percent and wages by 5 percent. A Penn Wharton study found it boosts manufacturing employment by nearly 10 percent. And the Tax Foundation estimated that full expensing would boost GDP by 2.3 percent and grow America’s capital stock by 6 percent. In other words, this is precisely the sort of tax reform that America’s stagnating economy needs.

Rising geopolitical volatility — particularly between the U.S. and its largest trade partner, China — only adds to the reasons to support full-expensing reforms. So far, however, federal policy-makers have ignored this option, instead responding to this increased volatility with industry-by-industry subsidies: The CHIPS Act provided subsidies to America’s semiconductor production, for instance, and the so-called Inflation Reduction Act provided almost $1.2 trillion in subsidies to green-energy technologies.

While moving quickly to re-shore and friend-shore critical supply chains is sometimes necessary, these laws also risk setting a bad precedent. Indeed, some people will argue that — in addition to semiconductors and green energy — America also needs to do more to secure its supply chains for antibiotics, telecommunications equipment, rare-earth metals, and a host of other products.

Before creating more and more piecemeal government subsidies, though, policy-makers should first enact full expensing for all industries. Doing so would remove the tax code’s bias against domestic capital expenditures, make it more likely that domestic businesses could recover their investment costs, and thus incentivize more investment right here at home. Because delayed cost recovery is particularly harmful when there is high inflation — which crushes the present value of future tax deductions that are spread out over decades — implementing full expensing would be especially effective today. Without it, the current tax code will fail to preserve the proper incentives to invest, and will thus reduce the capital expenditures that America needs.

The good news is that Mississippi lawmakers did not invent this policy out of the blue. They simply made permanent a tax policy that used to be a part of federal law. Oklahoma also allows full expensing for machinery and equipment costs, while Tennessee provides it for research and experimentation costs. Like Mississippi, Nebraska lawmakers are considering making full expensing permanent for all short-lived assets with L.B. 754. As full expensing gains momentum, more states should attach it to their budgets this spring.

Congress could also boost innovation and manufacturing by enacting full expensing as a part of an omnibus budget deal in the coming months. Full expensing has bipartisan federal appeal, too. Senators Maggie Hassan (D., N.H.) and Todd Young (R., Ind.) are sponsoring a bill that would allow full expensing for research and experimentation costs.

Strengthening America’s critical supply chains is an overriding national objective, and tax policy can play a significant role in achieving it. Moving forward, other state and federal budget writers should take note of Mississippi’s full-expensing program and implement similar measures. If more states and the federal government get on board, the U.S. will attract vital capital investments that lead to job creation, wage growth, economic expansion, and a secure domestic home for more of America’s critical supply chains.