The OBBBA Gets Expensing Right: Why States Should Follow Suit 210

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The One Big Beautiful Bill Act (OBBBA) introduces significant changes to federal tax policy, many of which directly impact state tax codes. While some provisions, like temporary deductions for tips and overtime, offer limited economic benefit and affect only a few states, the OBBBA’s new rules regarding the expensing of corporate investment are a different story. These pro-growth provisions affect most states and are supported by strong economic justification. Regardless of how states choose to address other aspects of the OBBBA, they should align with these improvements to the corporate tax code.

Understanding Business Expensing and Depreciation

Corporate income taxes are designed to be a levy on net income or profits. Consequently, most business expenses, such as compensation and the cost of goods sold, are deductible. However, when it comes to capital investments, the deductions are often less straightforward. Instead of an immediate deduction for the cost of new investments, businesses frequently see these deductions amortized over several years according to depreciation schedules. These schedules vary in length based on the asset class.

While depreciation makes sense from an accounting perspective—a company buying equipment isn’t $10 million poorer but has an asset of similar value—it doesn’t accurately reflect the non-profit nature of the investment for tax purposes. The money invested in equipment is not profit, just as the amount spent on compensation isn’t. Therefore, depreciation schedules have no place in a well-structured tax policy.

Key Business Expensing Changes in the OBBBA

The OBBBA introduces four major changes to business expensing, all of which are highly relevant for state tax policies:

  • Restoration and Permanence of § 168(k) Full Expensing: This provision, which allows for immediate expensing of machinery, equipment, and certain other tangible property, is restored and made permanent.
  • Reversal of § 174 Amortization for Research & Experimental Expenditures: The recent requirement to amortize research and experimental expenditures is reversed, bringing back immediate cost recovery for R&D costs.
  • Creation of New § 168(n) for Qualified Production Property: A new provision introduces first-year expensing for qualified production property, such as factories.
  • Increased Cap on § 179 Expensing Deduction for Small Businesses: The limit on the § 179 expensing deduction for small businesses is raised from $1 million to $2.5 million.

These changes build upon previous legislation like the Tax Cuts and Jobs Act (TCJA) of 2017, which temporarily permitted full expensing and increased the § 179 limit. The TCJA also introduced the requirement to capitalize and amortize R&D expenditures starting in 2022, a policy widely expected to be eliminated.

State-Level Impact and Economic Justification

The OBBBA’s expensing provisions will impact states differently based on their current tax conformity. The § 168(k) change is expected to affect 17 states, while the higher § 179 cap will flow through to 38 states. The restoration of § 174 expensing and the creation of § 168(n) will ultimately show up in virtually all states’ tax codes.

While these provisions will reduce state revenue, similar to the new deductions for tips and overtime, they have a strong economic justification. They are pro-growth, make the corporate tax code more neutral and economically efficient, and, for § 168(k) and § 174, represent a return to policies many states already followed until recently.

Detailed Breakdown of Key Provisions

  • § 168(k) Bonus Depreciation: Fifteen states already offer § 168(k) first-year expensing to the same extent as the federal government, with two more offering a fraction and three having permanent full expensing regardless of federal policy. Conforming to the restored federal policy would bring these 17 states back to their pre-2023 expensing levels. Full expensing is sound tax policy, and states should consider conforming to the restored federal policy if they have previously decoupled.
  • § 174 Research & Experimentation Cost Recovery: The requirement for five-year amortization of R&D costs was largely seen as a budget gimmick. Historically, corporations have been able to deduct R&D expenditures immediately since 1954, a practice followed by every state with a corporate income tax. When the federal government shifted to amortization in 2022, 10 states continued immediate expensing. Conforming to the restoration of this provision, which was a long-standing policy, is crucial for fostering innovation. Decoupling from this provision would be shortsighted.
  • § 168(n) Qualified Production Property Deduction: This new, temporary provision provides first-year expensing for certain structures, primarily manufacturing plants, until 2028. While temporary, neutral cost recovery for structures is good policy and could become permanent. Despite its temporary nature, it still represents an improvement by accelerating construction projects and inducing overall growth. Most states generally conform to § 168 provisions, making it likely they will incorporate this new section.
  • § 179 Small Business Expensing: The OBBBA raises the § 179 cap from $1 million to $2.5 million, with inflation adjustments. This provision is vital for cost recovery policy because it applies to pass-through businesses as well as C corporations, and covers assets (like used machinery and HVAC) not eligible under § 168(k). While it has a dollar limit and phases out for larger investments, it significantly benefits small businesses. Most states already incorporate the IRC’s cap and phase-out threshold, although 12 states have their own lower caps.

The Economic Benefits of Immediate Expensing

Without these four expensing provisions, businesses can only deduct capital investment costs over extended periods—up to 20 years for § 168(k)-eligible assets and 39 years for § 168(n)-eligible factories. This imposes real costs due to inflation and the time value of money, as the present value of a deduction spread over many years is less than receiving the full deduction immediately. This embedded disincentive for capital investment is addressed by the OBBBA’s provisions, making the tax code more favorable to investment and growth. States should align with these changes to enhance their economic competitiveness.

State Conformity and Revenue Implications

States generally use the Internal Revenue Code (IRC) as a baseline for their own corporate income taxes, leading to an automatic flow-through of federal changes. However, two main disconnects exist:

  1. Out-of-date IRC conformity: Some states conform to an older version of the IRC, delaying the incorporation of OBBBA changes.
  2. Express modifications or decoupling: Some states explicitly modify or decouple from specific federal provisions, such as § 168(k) bonus depreciation or setting lower caps for § 179.

Conversely, some states already offer more generous expensing provisions than the federal government, meaning the OBBBA changes will simply align federal policy with existing state policy, simplifying compliance.

State Conformity with the OBBBA’s Expensing Provisions

The table below outlines state conformity to each expensing provision and their conformity status. A checkmark indicates a state is in line to conform once its conformity date aligns with the post-OBBBA IRC. “100%” signifies a permanent 100% expensing provision adopted by state lawmakers, regardless of federal policy. States with “Rolling” conformity automatically adopt the newest IRC version, while “Static – Current” indicates conformity to a recent IRC version (December 31, 2024, or January 1, 2025). “Static – Lagged” denotes older conformity dates.

State Conformity Status § 168(k) § 168(n) § 174 § 179
Alabama Rolling ✓ ✓ 100% ✓
Alaska Rolling ✓ ✓ ✓ ✓
Arizona Static – Current ✓ ✓ ✓ ✓
Arkansas Selective ✓ ✓
California Static – Lagged ✓ ✓ ✓
Colorado Rolling ✓ ✓ ✓ ✓
Connecticut Rolling ✓ ✓ ✓
Delaware Rolling ✓ ✓ ✓ ✓
District of Columbia Rolling ✓ ✓ ✓ ✓
Florida Static – Lagged ✓ ✓ ✓ ✓
Georgia Static – Current 100% ✓ ✓
Hawaii Static – Current ✓ ✓ ✓ ✓
Idaho Static – Current ✓ ✓ ✓ ✓
Illinois Rolling ✓ ✓ ✓ ✓
Indiana Static – Lagged ✓ 100% ✓
Iowa Rolling ✓ ✓ ✓ ✓
Kansas Rolling ✓ ✓ ✓ ✓
Kentucky Static – Current ✓ ✓ ✓ ✓
Louisiana Rolling 100% ✓ 100% ✓
Maine Static – Lagged ✓ ✓ ✓ ✓
Maryland Rolling ✓ ✓ ✓ ✓
Massachusetts Rolling ✓ ✓ ✓ ✓
Michigan Rolling ✓ ✓ ✓ ✓
Minnesota Static – Lagged ✓ ✓ ✓ ✓
Mississippi Rolling 100% ✓ 100% ✓
Missouri Rolling ✓ ✓ ✓ ✓
Montana Rolling ✓ ✓ ✓ ✓
Nebraska Rolling ✓ ✓ 100% ✓
Nevada n.a. No Income Tax No Income Tax No Income Tax No Income Tax
New Hampshire Static – Lagged ✓ ✓ ✓
New Jersey Rolling ✓ 100% ✓
New Mexico Rolling ✓ ✓ ✓ ✓
New York Rolling ✓ ✓ ✓ ✓
North Carolina Static – Lagged ✓ ✓ ✓ ✓
North Dakota Rolling ✓ ✓ ✓ ✓
Ohio Static – Current No CIT No CIT No CIT No CIT
Oklahoma Rolling 100% ✓ ✓ ✓
Oregon Rolling ✓ ✓ ✓ ✓
Pennsylvania Rolling ✓ ✓ ✓ ✓
Rhode Island Rolling ✓ ✓ ✓ ✓
South Carolina Static – Current ✓ ✓ ✓ ✓
South Dakota n.a. No Income Tax No Income Tax No Income Tax No Income Tax
Tennessee Rolling ✓ ✓ 100% ✓
Texas n.a. No Income Tax No Income Tax No Income Tax No Income Tax
Utah Rolling ✓ ✓ ✓ ✓
Vermont Static – Current ✓ ✓ ✓ ✓
Virginia Static – Current ✓ ✓ ✓ ✓
Washington n.a. No Income Tax No Income Tax No Income Tax No Income Tax
West Virginia Static – Current ✓ ✓ ✓ ✓
Wisconsin Static – Lagged ✓ 100% ✓
Wyoming n.a. No Income Tax No Income Tax No Income Tax No Income Tax

Note: A checkmark indicates that a state is in line to conform to a given provision if and when its conformity date aligns with a post-OBBBA version of the IRC. “100%” denotes an expensing provision made permanent at 100% by state lawmakers regardless of federal policy. Source: State statutes; Tax Foundation research.

Projected Revenue Implications

Estimating the precise revenue implications for all 50 states is complex, and state revenue agencies’ figures should be preferred where available. However, we offer the following estimates as reasonable approximations. If all states currently in line to conform maintain that conformity, the nationwide cost is estimated at $12.8 billion per year, or less than 0.4% of state revenues. If all states chose to conform to all provisions, this cost would rise to $20.7 billion per year, or about 0.6% of state revenues.

It’s important to note that first-year expensing provisions frontload costs. While some revenue reduction is permanent due to the removal of the amortization penalty, much of the initial cost disappears in later years. The § 168(k) provision also includes a catch-up element for retroactive full expensing. Consequently, costs are significantly higher in 2025 and 2026, becoming much lower or even negative in subsequent years.

The table below provides cost estimates for both a 10-year average and for tax year 2026. The 10-year average offers a better long-term cost estimate, while the 2026 figures highlight the higher initial costs. For 2026, the nationwide cost for conforming states would be $17.3 billion, and if every state aligned with federal policy, the cost would be $38.2 billion.

Revenue Estimates for State Conformity to the OBBBA’s Expensing Provisions

Estimates for Average Annual Costs over the Budget Window and for 2026, in Millions of Dollars

State Ten Year Average Tax Year 2026
§ 168(k) § 168(n) § 174 § 179 § 168(k) § 168(n) § 174 § 179
Alabama $47 $26 $0 $6 $303 $30 $0 $9
Alaska $9 $5 $32 $0 $59 $6 $38 $0
Arizona $40 $22 $141 $5 $259 $25 $165 $7
Arkansas $18 $10 $62 $2 $114 $11 $73 $4
California $843 $471 $2,977 $119 $5,466 $534 $3,493 $172
Colorado $54 $30 $192 $9 $352 $34 $225 $13
Connecticut $73 $41 $259 $9 $476 $46 $304 $13
Delaware $13 $7 $44 $2 $81 $8 $52 $2
District of Columbia $27 $15 $94 $3 $173 $17 $110 $5
Florida $128* $72 $453 $3 $832* $81 $532 $4
Georgia $76 $42 $0 $15 $490 $48 $0 $22
Hawaii $10 $5 $35 $3 $64 $6 $41 $4
Idaho $23 $13 $82 $4 $151 $15 $96 $6
Illinois $242 $135 $856 $22 $1,572 $153 $1,005 $32
Indiana $22 $12 $0 $5 $142 $14 $0 $8
Iowa $20 $11 $72 $3 $132 $13 $84 $5
Kansas $30 $17 $107 $5 $196 $19 $125 $7
Kentucky $50 $28 $176 $4 $324 $32 $207 $6
Louisiana $0 $11 $0 $3 $0 $13 $0 $5
Maine $9 $5 $33 $3 $61 $6 $39 $4
Maryland $103 $58 $364 $10 $669 $65 $427 $14
Massachusetts $140 $78 $496 $16 $910 $89 $582 $24
Michigan $62 $35 $219 $11 $401 $39 $257 $15
Minnesota $129 $72 $456 $14 $837 $82 $535 $20
Mississippi $0 $6 $0 $2 $0 $7 $0 $3
Missouri $35 $20 $124 $7 $227 $22 $145 $11
Montana $7 $4 $23 $2 $42 $4 $27 $4
Nebraska $26 $14 $0 $4 $167 $16 $0 $5
Nevada $0 $0 $0 $0 $0 $0 $0 $0
New Hampshire $25 $14 $87 $1 $160 $16 $102 $1
New Jersey $196 $110 $0 $21 $1,273 $124 $0 $31
New Mexico $17 $9 $59 $2 $108 $11 $69 $3
New York $584 $327 $2,064 $47 $3,790 $370 $2,422 $68
North Carolina $36* $20 $127 $12 $233* $23 $149 $17
North Dakota $7 $4 $23 $1 $43 $4 $27 $1
Ohio $0 $0 $0 $7 $0 $0 $0 $10
Oklahoma $0 $8 $51 $4 $0 $9 $59 $6
Oregon $34 $19 $121 $10 $222 $22 $142 $15
Pennsylvania $102 $57 $362 $12 $664 $65 $424 $17
Rhode Island $12 $7 $43 $1 $79 $8 $51 $2
South Carolina $32 $18 $114 $9 $208 $20 $133 $12
South Dakota $0 $0 $0 $0 $0 $0 $0 $0
Tennessee $61 $34 $0 $1 $398 $39 $0 $2
Texas $0 $0 $0 $0 $0 $0 $0 $0
Utah $32 $18 $111 $5 $205 $20 $131 $8
Vermont $6 $4 $22 $1 $41 $4 $26 $2
Virginia $61 $34 $216 $15 $397 $39 $254 $21
Washington $0 $0 $0 $0 $0 $0 $0 $0
West Virginia $9 $5 $33 $1 $61 $6 $39 $2
Wisconsin $51 $28 $0 $10 $329 $32 $0 $14
Wyoming $0 $0 $0 $0 $0 $0 $0 $0
Total – Conforming States $424 $1,430 $10,730 $250 $2,750 $1,622 $12,593 $364
Total – All States $3,502 $1,983 $10,730 $4,526 $22,711 $2,246 $12,593 $669

Note: Revenue estimates are in bold where a state conforms to the given provision subject to adopting a post-OBBBA conformity date. A $0 in italics denotes a policy already implemented by the state, meaning that there is no additional cost of conformity. § 179 estimates only include the increase from $1 million to $2.5 million; we do not estimate any additional cost of newly incorporating the provision for states which currently offer less than $1 million. * Florida and North Carolina only conform to a small fraction of federal § 168(k) amounts. They are indicated as not conforming and the cost of full conformity is given, but under current policy, the states’ additional annual costs would be $18 and $5 million per year respectively. These amounts are included in the “conforming states” subtotals.

Conclusion: A Prudent Path for States

While incorporating these provisions has a cost, state revenues have significantly increased in recent years, with tax collections rising 19.4% in real terms since the TCJA’s implementation in 2017, and 50% over the past two decades. Even with recent stabilization, most states have the capacity to adopt these pro-growth provisions.

Furthermore, the larger provisions, such as § 168(k) and § 174, are not entirely new. Many states conformed to § 168(k) when it provided full expensing before 2023, and all states with a corporate income tax conformed to first-year cost recovery for research and development until 2022. These policies have a proven track record, in some cases for nearly seven decades. There is no economic reason for states to abandon them now.

Methodology

The estimated total U.S. reduction in federal taxable income for each provision is apportioned to each state based on its share of state-level corporate income tax bases. This is derived from rate-adjusted Census QTAX data for the four most recent quarters (through Q1 2025). Tax revenue losses are calculated against each state’s top marginal corporate income tax rate, as most states have single-rate corporate income taxes, and expensing typically applies against the top marginal rate even in graduated-rate structures.

Estimates for reductions in taxable income are derived from the Tax Foundation General Equilibrium Model, except for § 179, where estimates are based on Office of Management and Budget revenue projections. For § 179, which is primarily claimed against the individual income tax, 10.6% of the reduction in taxable income is assessed against corporate income taxes, with the remainder applied to individual income tax liability. This aligns with Joint Committee on Taxation expenditure estimates. For the individual income tax portion, each state’s share of the reduction in federal taxable income is allocated based on state shares of federal income tax liability from IRS Statistics of Income, with a blended average rate for upper-middle-class earners applied.

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