Staunching a Loss: How States Lose the Bucks

From our friend Bob Williams:

Staunching a Loss

By Penelope Lemov February 17, 2010

By not opting out of a federal tax deduction, states stand to lose millions in revenues.

A few weeks ago, the Louisiana Legislature voted to allow the state to follow the federal tax code for the domestic production credit. The credit, enacted as Section 199 of the federal Internal Revenue Code, lets companies claim a tax deduction based on profits from "qualified production activities," a category that includes manufacturing and utility companies as well as such diverse business activities as food production and filmmaking.

Federal estimates suggest that allowing this deduction will reduce the revenue yield of corporate taxes by roughly 3.1 percent in 2011. States are not required to allow this deduction, and in the six years since the U.S. Congress passed the credit, 21 states and the District of Columbia have opted out. Twenty-five, however, have either done as Louisiana has and voted to allow the deduction or else they've taken no action to opt out of the credit. (Four states lack personal and corporate income taxes and so are unaffected.)

As the final year of the phase-in of the domestic production credit kicks in — and the cost of the credit to state income tax revenue rises — I talked to Nicholas Johnson of the Centers on Budget and Policy Priorities about the credit, how much it will cost states who have not acted and what states can do about it.

For more, see http://www.governing.com/print/column/staunching-loss.