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Stopping the “Innovation Tax” Will Help Attract More Innovators & Job Creators To Tennessee

BY PATRICK GLEASON

January 14, 2022 10:23AM

Tennesseans are fortunate to live in one of the nine no-income-tax states and have the nation’s third-lowest tax burden. Fortunately, state policymakers understand that, despite being able to boast about a relatively favorable tax climate, there is always room for further improvement. Especially since the states that Tennessee is competing with continue to improve their tax and regulatory environments. As such, now is no time for Volunteer State lawmakers to rest on their laurels. While Tennessee does not have a personal income tax, it does levy a corporate income tax and that is where reforms would make Tennessee even more competitive. 

Aside from eliminating the remnants of the state’s professional privilege tax, the last vestige of an income tax in Tennessee, one of the most pro-growth reforms that Tennessee legislators could enact in 2022 would be to decouple the state tax code to prevent the upcoming “innovation tax” hike. For decades, companies and innovators could fully deduct research and development costs. While the Tax Cuts & Jobs Act (TCJA), the federal tax reform bill signed into law at the end of 2017, improved the federal tax code on net and provided tax relief for the vast majority of Americans, one of the few downsides of the TCJA was that it ended that deduction starting in this year. Now companies must amortize research and development expenses over five years. 

To make matters worse, Tennessee, like most states, automatically conforms to the federal tax code. That means that the TJCA’s change would also raise corporate taxes on innovative companies here in Tennessee. “Decoupling” or stopping the automatic update of the change at the federal level would allow companies in Tennessee to continue to fully deduct R&D expenses. 

Perhaps even more important, since most states automatically conform to the federal code, states that take the initiative to decouple from this tax hike will have an advantage over states that do not. Tennessee lawmakers can get a jump on the competition by passing such legislation in 2022. By decoupling the state tax code from the federal code’s extended R&D amortization period, state policymakers can make Tennessee an even more attractive destination for entrepreneurship, innovation, investment, and the associated job creation.