By Sarah Stecker

INTRODUCTION

Sometimes, doing nothing can be costly. If New Jersey does not take action to separate itself from a recent federal tax change related to depreciation by businesses, the state will lose millions of dollars in the next few years.

Depreciation is a broad concept that, simply put, represents the degree of lost value of such tangible items as machines and equipment. When used for tax purposes, depreciation enables businesses to decrease their reported income – and in so doing, lower their taxes – by an amount reflecting the fact that depreciable items are now another year older and closer to being unusable. Formulas for calculating depreciation are determined by law and, obviously, businesses pay close attention to the legislative process and seek the most favorable possible treatment.

From a business standpoint, the federal economic stimulus package passed by Congress and signed into law by President Bush in March makes depreciation deductions more generous. The economic stimulus package, named the Job Creation and Worker Assistance Act of 2002, introduces what is called “bonus depreciation,” which allows businesses to claim an immediate, additional tax deduction of up to 30 percent of the cost of certain new equipment purchases – instead of following the standard accounting practice of depreciating the full cost gradually over several years.

Like any tax break granted by the federal government, bonus depreciation will cost the federal treasury money. But the implications go deeper. Because of the way state tax laws are written, federal bonus depreciation also will cost state treasuries money. And New Jersey is among those that stand to lose the most. There are, however, steps that a state can take to protect itself from this revenue loss. This report explains the situation New Jersey faces and what can be done.

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