One of the many problems with the copious tax breaks that Congress showers on corporations is that they provide perverse incentives for businesses to expand the definition of what they do so they can claim certain tax deductions, even if they haven’t changed anything about their business in practice.
An egregious example of this is Starz, the publicly traded media company best known for its cable channels Starz and Encore. The company’s annual report, released earlier this week, “concluded that its 2014 and 2013 programming packages met the… criteria” for a special tax break for manufacturers. In plain English, this means the company claimed the manufacturing deduction and reduced its federal income taxes by $20 million over two years because it “manufactured” original television productions such as Spartacus, Outlander and Da Vinci’s Demons.
We’ve criticized corporate tax breaks before for being so loosely written that corporations flout the intent of the law and claim the breaks for dubious activities. Even putting cynicism aside and conceding some tax credits for businesses could be a good idea, the manufacturing deduction is an example of how good intentions can lead to bad policy.
The U.S. Senate’s Finance Committee on Tuesday held a hearing, Tax Reform, Growth and Efficiency. In her testimony, Jane Gravelle of the Congressional Research Service singled out several corporate tax breaks that clearly make the U.S. economy less efficient. Among them was the “qualified production activities” deduction, otherwise known as the manufacturing deduction.
When congressional tax writers in 2004 declared their intention to provide a lower corporate tax rate for manufacturing to keep companies from moving production offshore, lobbyists from dozens of industries descended on Capitol Hill to convince lawmakers that their activities should fall within the legal definition of “manufacturing.” As a result, companies such as Starbucks are now able to say with a straight face that they’re eligible for the manufacturing tax break when they grind coffee beans, and Starz can join the charade and claim its “manufacturing” programming.
Gravelle told the Senate Finance Committee that Congress could “reduce distortion” in the corporate tax code by eliminating tax breaks, such as the manufacturing deduction, that “[favor] certain kinds of industries over others.” She also suggested that in lieu of repealing the manufacturing break, Congress could simply “confine it to corporate manufacturing.”
This is a polite way of suggesting that when most Americans think of the “manufacturing” capacity they want to see preserved in the United States, they don’t envision include Hollywood shoots featuring loincloth-wearing actors. Either of Gravelle’s suggestions would be a welcome improvement on the current corporate tax system—but outright repeal would be the simplest and most straightforward fix.