Virginia Governor Bob McDonnell just signed into law the expansion of a tax break meant to support “manufacturing” that has, in fact, been used to subsidize everything from making movies to designing homes to roasting coffee. The break piggybacks on the federal deduction for “Qualified Production Activities Income” (QPAI), which was first proposed in the early 2000’s as a way to benefit US-based manufacturers. As the proposal made its way through Congress, however, it morphed into a loosely defined tax break that Starbucks, for example, has been able to use to get $40 million knocked off its tax bill over the last few years. Walt Disney, Halliburton, Altria and the Washington Post Company are among scores of companies - not known for manufacturing - that have successfully exploited this loophole.
In most cases, state corporate tax law is based on the federal corporate tax, which means that when Congress creates an expensive giveaway like the QPAI deduction, the states go ahead and offer the same break for reasons of simplicity. But 22 states have specifically decided that this break isn’t worth the cost, and have “decoupled” their laws from that part of the federal code. Unfortunately, Virginia is moving in exactly the opposite direction.
The Virginia Department of Taxation estimates that this recent expansion of the state’s QPAI deduction will drain somewhere in the neighborhood of $10 million from the state’s coffers each year. Worse, Virginians can’t expect much of a return on that $10 million “investment.” As the Institute on Taxation and Economic Policy (ITEP) explains:
“The QPAI deduction has little value as an economic development strategy for individual states, because a corporation can use the QPAI deduction to reduce its taxable income for “domestic production” activities anywhere in the United States. That is, a multi-state company that engages in manufacturing activities in Michigan will be able to use those activities to claim the QPAI deduction—and thus cut its taxes—in any state that offers the deduction, even if the company does not have manufacturing facilities in those states.
Eliminating state QPAI deductions was recently proposed in a joint CTJ-ITEP report as a way to improve the adequacy and fairness of state corporate taxes. That report showed that many profitable companies – including some headquartered in Virginia – are paying at a rate equal to less than half the average statutory state corporate tax rate. Loopholes like QPAI are the reason.
Photo of Gov. Bob McDonnell via Gage Skidmore Creative Commons Attribution License 2.0