Michigan lawmakers responded late in 2025 to the federal One Big Beautiful Bill Act by putting a three-year pause on the implementation of five new federal tax provisions, including one for expensing of research and development costs. This “decoupling” from the federal tax reforms is aimed at saving revenue for the state budget, but it puts Michigan businesses at a competitive disadvantage. Michigan should revisit this decision, just as Congress did last year.

Corporate income taxes are imposed on net income (profits), which requires deducting business expenses such as compensation, capital investments, and the cost of goods sold. Most business expenses are deducted immediately, but capital investment (investing in machinery, equipment, and structures) has historically been deductible over time, which penalizes investment. In other words, companies pay more income tax when they build factories instead of buying more advertising.

Reforms at the federal level reduced this penalty through several expansions of “bonus depreciation,” culminating in temporary full expensing under the Tax Cuts and Jobs Act. These changes were restored and made permanent under the One Big Beautiful Bill Act.

But this was never a question for R&D. From 1954 until 2022, research and development expenses — technically, the federal government uses the term Research and Experimentation (R&E) — enjoyed a full deduction in the year in which the expense was incurred.

However, Congress in 2022 made the expensing rule temporary, so companies lost the ability to expense research and development costs in full.

Before 2022, states universally conformed to Internal Revenue Code § 174, which provides for immediate expensing of Research and Experimentation expenditures. Now, however, several states are hesitating to update their tax codes’ conformity to bring in the new federal provisions. Michigan became the first state to reject the restoration of R&E expensing outright in October. Pennsylvania and the District of Columbia joined in shortly after.

Michigan lawmakers chose not to conform with the federal changes in an attempt to make to make the state’s budget deal work. First-year expensing does have a cost for states for the same reason that it’s beneficial for businesses: Under amortization, businesses’ deductions are eroded by inflation, and their present value is reduced due to the time value of money.

But in the long run, the state revenue costs are modest. The cost to Michigan’s budget is estimated at $120 million per year — just a quarter of the revenue generated by the recent marijuana tax hike. It is less than 0.3% of the state budget, and also less than the expected increase in revenue for the upcoming fiscal year.

The real reason to restore first-year expensing, however, is to restore our state’s economic competitiveness. It makes no sense for the corporate tax code to discriminate against investment in research and development. Ironically, Michigan offers an R&D tax credit even as it penalizes R&D expenses. The disallowed first-year full R&E deduction would be available to all corporate taxpayers with net income, whereas R&D incentives are often only available to large incumbent firms.

Research shows that some of the most important innovations come from startups that aren’t locked into existing ideas and established research pathways. Those innovative new companies could face corporate income tax liability even though they’re not actually profitable yet.

Policymakers typically seek to promote research and development, recognizing that it grows the economy and has positive externalities. Decoupling from the federal reform makes those pro-growth investments more costly. And while some of the increased burden will fall on corporate investors nationwide who own shares of companies that sell into Michigan, the tax change is uniquely damaging to smaller local corporations just getting off the ground.

In an ideal world, Michigan would adopt the pro-growth reform of providing immediate expensing for machinery and equipment, as 18 states already do. But the legislature’s hasty actions on R&D expenses were particularly egregious. Full expensing of R&D has been part of Michigan’s corporate income tax code from the very beginning. Michigan allowed first-year R&D expensing from the creation of its corporate income tax in 1967 until federal policy changed in 2022. Lawmakers should restore a policy that served the state well for 55 years.

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