President-elect Donald Trump’s election was premised in part on his guarantee to deliver a stronger, more competitive, and more resilient nation. Federal tax changes to be enacted in 2025 must reinforce that mandate by making permanent two critical provisions from the 2017 Tax Cuts and Jobs Act.
America’s tax code should enhance our internal dynamism while also boosting our global competitiveness. Two tax policies stand out for achieving these goals. First, the federal tax code should maximally incentivize inter-state competition by nixing tax subsidies for profligate tax-and-spend states. This can be achieved by permanently capping the federal deduction for state and local taxes, or SALT, paid. In addition, the federal tax code must maximally incentivize production in America by permanently providing 100% bonus depreciation for all capital expenditures.
American federalism proves the truism that competition makes all parties stronger. States compete across a range of policy issues, including taxation, incentivizing all states to continually adjust and improve. Furthermore, interstate competition makes America more dynamic and incentivizes policy healing: bad policies in poorly governed states are often resolved by better policies in well-governed states, forcing the mismanaged states to reform. A stronger United States emerges from America’s 50 competitive parts.
Under the 2017 Tax Cuts and Jobs Act, the federal SALT cap was set at $10,000. It is essential to make this SALT cap permanent in 2025 rather than allow it to expire. Taxation and spending levels are out of control is some of America’s largest states, including California and New York, where voters are justified to wonder how their sky-high state taxes translate into oftentimes atrocious government services.
State fiscal mismanagement weakens our country and should not be subsidized through a federal deduction for SALT. In contrast, state government competition, incentivized by a SALT cap, drives state government efficiency, a key goal of the Trump administration. Elon Musk, the head of the new Department of Government Efficiency, is the most famous example of the California-to-Texas exodus. Migration records make clear that Musk’s move is happening en masse as overtaxed New Yorkers and Californians are pouring into well-managed states like Florida and Texas, thus rewarding prudent state governance and incentivizing reform in profligate states. The SALT cap, which maximizes interstate competition and efficiency, should be made permanent.
While state competition makes America more internally competitive and dynamic, America’s global competition against China should be a front-and-center consideration across federal policy areas, including taxation. America’s tax code must slash the cost of capital for U.S.-based production. Full expensing applied to all asset classes, also known as 100% bonus depreciation, is the tax reform to best achieve this objective by allowing for the immediate write-off of capital expenditures in research and experimentation, machinery and equipment, and production plant and facilities.
Full expensing provides the appropriate definition of “income,” which is business revenue minus costs. Capital expenditures are business costs, and without full expensing, capex costs are written off over decades under depreciation schedules that extend from 5 to 39 years, depending upon the asset class. This raises the cost of capital by denying businesses full cost recovery for the critical investments America needs to win its global competition with China.
Unlike tax incentives for specific industries, full expensing provides a broad and neutral incentive to invest in the United States across industries, which benefits all forms of production. This incentivizes near-term reshoring of critical supply chains. In the long-term, this sets the table for America’s economy to do what it does best — develop new and unplanned innovations in areas that end up reshaping global industries.
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The 2017 Tax Cuts and Jobs Act provided 100% bonus depreciation for costs racked up for research and experimentation and machinery and equipment for tax years 2018-2022. But in 2023, bonus depreciation for machinery and equipment fell to 80%, then to 60% in 2024, and is scheduled for 40% in 2025. Research and experimentation costs are now written off over 5 years. Instead of allowing this phase-out to continue, 100% bonus depreciation should be made permanent in the federal tax code and expanded to all asset classes, including capex in new plants and facilities.
Trump seeks to unleash a new wave of American dynamism, prosperity, and global power. Trump’s 2017 Tax Cuts and Jobs Act contains two provisions critical to this objective: the SALT cap and 100% bonus depreciation. In 2025, federal lawmakers must make these provisions permanent to advance America’s internal dynamism and global competitiveness.
Michael Lucci is a visiting economic policy fellow for the State Policy Network.
This article was originally published at www.washingtonexaminer.com
