States Can Opt Out of the Costly and Ineffective “Domestic Production Deduction” Corporate Tax Break
 CBPP calculations based on 2009 IRS data.
 Here and throughout this report, the District of Columbia is counted as a state.
 For this reason, the tax break is sometimes referred to as the qualified production activities income deduction, or QPAI.
 President Obama has proposed eliminating this tax break for oil and natural gas production, which has been limited to a 6% deduction in tax years 2009 onwards. The Joint Committee on Taxation estimates that eliminating the deduction for these companies would save the federal government $986 million in FY 2014. Available at http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/spec.pdf, page 222.
 Calculated from IRS Statistics of Income data for tax year 2009.
 The Office of Management and Budget projects a similar federal revenue loss — $15.33 billion by fiscal year 2014 from both corporate and personal income taxes.
 The state estimates in this paper represent an approximation of the impact of the domestic production deduction on state tax revenues. The first step in the estimating process was to use the estimates of the Joint Committee on Taxation (JCT) on the impact of the deduction on corporate and personal income tax revenues in federal fiscal year 2014. (See: Joint Committee on Taxation, Estimates Of Federal Tax Expenditures For Fiscal Years 2011-2015, January 17, 2012, p. 37. Available at https://www.jct.gov/publications.html?func=startdown&id=4386.) These figures were divided by the Congressional Budget Office’s (CBO) projections of actual corporate and personal income tax revenues for 2014. These calculations yielded estimates that the deduction would reduce corporate tax revenues by 2.84 percent in 2014. Personal income tax revenues would be reduced by about 0.3 percent in 2014.
The second step was to multiply those estimated percentage reductions in revenues by the latest available quarterly corporate and personal income tax collections figures for each state, as reported by the U.S. Census Bureau. The one exception to this process is Kentucky, where the fiscal impact listed in the state tax expenditure report was used.
The spreadsheet used to generate these estimates is available upon request from Chris Mai at [email protected].
 Even more accurate estimates might be produced by considering the extent to which a state’s predominant industries qualify for the deduction. A state with a high concentration of industries that have a high percentage of deductible income is likely to suffer even larger losses.
 Five states have partially decoupled from the domestic production deduction. Alabama allows the deduction for the corporate income tax, but does not allow it for those companies filing under the personal income tax. Michigan decoupled from the deduction for the corporate income tax, but maintains the deduction for the personal income tax. Kentucky and New Jersey have narrowed the definition of what qualifies for the domestic production deduction. Pennsylvania allows the deduction for businesses filing taxes under the corporate income tax code, but not for those filing under the personal income tax code.
 When Congress considers a bill to cut taxes, its Joint Committee on Taxation (JCT) calculates the cost to the federal government, and this information becomes part of the public debate. But JCT does not calculate the cost to the states whose taxes will be cut due to federal conformity. Since no state bill is under consideration, state fiscal offices seldom analyze the impact either.
 The actual value of a state’s domestic production deduction to a corporation depends on several factors. The deduction applies to total taxable income, which is then “apportioned” to each state in which a corporation does business. The apportionment formula varies among states, but typically reflects the share of a corporation’s payroll, property, and sales that occur in a given state. So a multi-state corporation’s domestic production deduction equals its federal domestic production deduction multiplied by the relevant apportionment factor.
 These statistics cover only businesses that pay the corporate income tax, i.e., those governed by chapter 1, subchapter C of the Internal Revenue Code. Since the corporate income tax accounts for around 72 percent of the deduction overall, these huge firms received at least 67 percent of the deduction’s total value. The other 28 percent of the deduction was claimed against the personal income tax, which is paid by individual owners of S corporations, partnerships, and sole proprietorships. Data on the domestic production claimed by these firms is not available broken down by firm assets. These firms tend to be smaller on average. Even so, the benefit among firms exempt from the corporate income tax also seems to be skewed toward large firms. In 2009, among payers of the personal income tax, those with adjusted gross income over $5 million accounted for over 29 percent of the deduction.
 For example, Tennessee’s corporate income tax law provides as follows:
67-4-2006. "Net earnings" and "net loss" defined.
(a) (1) For a corporation . . . "net earnings" or "net loss" is defined as federal taxable income or loss . . . as adjusted by subsections (b) and (c).
(b) (1) There shall be added to a taxpayer's net earnings or net losses: . . .
(L) Any deduction made pursuant to 26 U.S.C. § 199;
 In calculating their taxable income or profit, corporations would ordinarily subtract an equal share of the cost of a piece of machinery or a factory each year over the expected useful life of the asset. Under accelerated depreciation, corporations are allowed to bunch those deductions in the early years of their ownership, resulting in smaller subtractions in the later years. If a state decouples from federal accelerated depreciation, in the year a corporation buys a piece of machinery or builds a new factory it will have to add back a portion of the deduction to taxable income reported for federal tax purposes in order to calculate taxable income for state tax purposes. But that means that its deduction for depreciation for state tax purposes will be less than the federal deduction in future years – requiring an additional subtraction from the federal deduction. Thus, decoupling from accelerated depreciation requires corporations to keep additional records in future years so that the future adjustment is calculated correctly. No such additional records are needed in the case of decoupling from the domestic production deduction, because it simply disallows a deduction with a single-year effect.