To help balance the state’s budget, the Vermont legislature has voted to suspend a scheduled increase in an obscure corporate tax break known as the “domestic production deduction.” It’s a sensible move. Other states with this tax break should consider freezing it or, better yet, joining the 22 states that have killed it altogether.
The federal government established the deduction, also known as the “qualified production activities income deduction” (QPAI), in 2004. Since most states’ tax codes are tied to the federal tax code, the deduction took effect automatically in most states as well, without policymakers’ explicit approval — or even knowledge in many cases.
The 2004 federal legislation phased in the tax break, with a 50 percent increase taking effect this year. (That’s the increase the Vermont legislature has voted to block.) As a result, the 25 states that haven’t removed the deduction from their tax codes (see map) stand to lose half a billion dollars next year, on top of all the revenue they’ve already lost as a result of the recession.
The corporations that benefit from QPAI, of course, want to keep it. But there is no evidence that QPAI is helping create and protect jobs. This tax deduction:
benefits firms even if they don’t have a single employee in the state,
gives more than 90 percent of its benefits to firms with assets over $100 million, and
benefits only profitable firms, not those struggling to stay afloat during the recession.
There are lots of better ways for states to improve their economies — like investing in education and supporting hard-hit working families — than to preserve an ill-considered tax break like this.