The NewStandard ceased publishing on April 27, 2007.

‘Domestic Productionâ€TM Tax Break Props Up Corporations, Hurts States

by Michelle Chen

Jan. 4, 2007 – A corporate tax break launched by Congress two years ago is quietly gnawing a nearly $2 billion hole in state coffers.

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But a new analysis by a progressive think tank shows that the majority of states saddled with the burden can easily opt out of the expanding tax deduction for corporations.

Congress enacted the so-called "domestic production deduction" in 2004 as part of an effort to bolster US manufacturing jobs. Under the provision, corporations get a tax deduction for engaging in "US production activities" – which could range from filmmaking to software engineering to food processing.

Though the provision is a federal tax break, corporations in most states can take advantage of a state-level version of the deduction, since state tax codes are generally based on federal statutes.

According to a study by the Center on Budget and Policy Priorities (CBPP), the deduction will cost states somewhere between $800 million and $1.3 billion in lost tax revenues in fiscal year 2008. And the losses will grow. This year, the deduction rate rises from 3 to 6 percent. In 2010, the rate will rise to 9 percent, costing states a projected $1.2 to $1.9 billion, based on current corporate profit levels. That amounts to around 5 percent of total state corporate tax revenues, according to the study.

But states are under no legal obligation to adopt the federal tax break in their own codes. In fact, eighteen states, including California, Maine and Mississippi, have already prevented corporations from applying the deduction when filing state taxes.

For the compliant states and Washington, DC, the CBPP says that eliminating the production deduction could boost revenue for public-welfare spending. Oregon, for instance, opted out of the corporate deduction in 2005 and instead beefed up a tax credit for low-income working families.

The provision is also draining federal tax revenues at a ballooning rate. Yet CBPP analyst Nick Johnson noted that on a national level – at least theoretically – "the tax break is perceived as a way to keep manufacturing jobs in the US." But he said similar promised benefits will not trickle down to local economies: among states offering the break, corporations can typically claim the deduction wherever they have investments, even without providing a single production job in that state.

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The NewStandard ceased publishing on April 27, 2007.

Michelle Chen is a staff journalist.

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