January 29, 2006

QPAI: A No-Brainer for the States

You wouldn't know it from the wave of cigarette tax hikes being proposed by governors across the nation this winter, but a lot of states actually have some pretty sensible revenue-raising options to choose from as they seek to plug budget holes. A new ITEP policy brief takes a new look at an arcane, but important, corporate tax reform that is attracting increased attention among state lawmakers: decoupling from the "Qualified Production Activities Income" (QPAI) deduction that was created by the big federal corporate tax cut enacted in 2004.

"Decoupling" is an issue that arises anytime Congress passes a corporate tax cut that reduces the federal taxable income of corporations. Since almost all states tie their corporate tax to federal income definitions, federal corporate tax breaks usually end up reducing state corporate tax collections as well. So when the federal corporate tax sneezes, the states catch a cold. "Decoupling" is how states immunize themselves-- decoupling just means that states change their definition of taxable income to exclude tax breaks they don't want to go along with. In the case of QPAI, decoupling basically means changing a state's definition of taxable corporate income from "federal taxable income" to "federal taxable income plus whatever amount of QPAI deduction the company took." It's a simple change.

And, from the perspective of state economic development goals, it's an obvious change to make. At a time when lawmakers in many states are starting to ask more skeptical questions about the real impact of their own state tax incentives on corporate investment and employment patterns, this federally-imposed new state tax cut has to be the most expensive and worst-targeted state tax break imaginable: one that could reduce a state's corporate taxes by up to 5 percent-- with absolutely no linkage between the state's revenue loss and the level of corporate activity or employment in that state. Let's be clear: going along with this tax break amounts to rewarding corporations for doing exactly what they were already doing.

And yet, as the ITEP policy brief documents, almost 30 states have, so far, decided that they think this tax break is a good idea, and have gone along with the federal change.

Some states have already taken active steps to plug this loophole. Here's Massachusetts as an example of how simple this legislation can be. But the majority of states still stand to lose a lot of revenue by adopting QPAI.

If you want to know where your state's lawmakers stand on QPAI-- and whether this expensive deduction is currently blowing a hole in your state's budget--contact ITEP. Contact information can be found on the policy brief.


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