DATA GEEK: Corporate tax break costs Colorado $20 million a year, study says

Colorado’s state government is missing out on $20 million a year because of a corporate tax break that lawmakers could discontinue, says a new study from the Center on Budget and Policy Priorities.

An excerpt from the study:

The federal government created this tax break, known as the “domestic production deduction” in 2004. Since most states base their own tax codes on the federal tax code, the tax break was carried over into many states without specific legislative scrutiny or a vote. Now it is costing not only the federal government but also 25 states a large, and growing, amount of money. By 2011, it will cost these states over $500 million per year.

The deduction — enacted as section 199 of the federal Internal Revenue Code — allows companies to claim a tax deduction based on profits from “qualified production activities,” a sweeping category that goes well beyond manufacturing to include such diverse activities as food production film-making and utilities — a substantial share of states’ corporate income tax base. …

States are not required to allow this deduction. Since 2008, Connecticut, New York, Wisconsin and the District of Columbia have joined 18 other states in disallowing the deduction and thereby reducing their current budget shortfalls and benefiting their states’ economies. But another 25 states continue to permit it. (Four states lack personal and corporate income taxes and so are unaffected.) If they continue to do so, a conservative estimate suggests the tax break will cost those states almost $505 million in 2011.

The center estimates discontinuing the deduction in Colorado would yield $20 million a year, which wouldn’t nearly close the budget gap in this state, but it could make a difference in come areas.

As usual, I make no endorsement on whether discontinuing the deduction is the right way to go. Some would view it as a tax increase that worsens business conditions in the state. Others would argue keeping the deduction is a form of corporate welfare. Please debate the merits in the comments section of this blog.