But in some instances, federal tax breaks for corporations undermine state budgets. As the Center for Budget and Policy Priorities detailed today, one particular tax break will cost states $600 million next year:
The federal government created this tax break, known as the “domestic production deduction,” in 2004. Since most states base their own tax codes on the federal tax code, the tax break was carried over into many states without specific legislative scrutiny or a vote. Now it is costing not only the federal government but also 25 states a large amount of money. By 2014, it will cost these states over $600 million per year.
The deduction — enacted as Section 199 of the federal Internal Revenue Code — allows companies to claim a tax deduction based on profits from “qualified production activities,” a sweeping category that goes well beyond manufacturing to include such diverse activities as food production, filmmaking, and utilities — a substantial share of states’ corporate income tax base.
These deductions are largely worthless, and many states have tossed them overboard. But 25 states still leave it intact:
As CBPP noted, “Firms can claim the domestic production deduction for profits from all qualifying domestic activities — meaning activities that occur anywhere within the United States. As a result, a multi-state firm can claim the deduction in a conforming state for production activities in any state, not just the state where the firm is filing.” They also benefit large firms at the expense of small.
State efforts to encourage corporate growth and job creation through the tax code usually encourage a race to the bottom, as corporations play states off each other in order to secure the most preferential treatment, and then feel no hesitation about up and leaving later. Of course, paying corporations to create jobs is only one of the bone-headed ways states try to generate economic activity.