The Domestic Production Activities Deduction and U.S....
Transcript of The Domestic Production Activities Deduction and U.S....
The Domestic Production Activities Deduction and U.S. Employment
A Pete V. Domenici Fellowship White Paper
Fall 2012 Prepared by Dr. Larry Tunnell, Professor of Accounting and Dr. Anthony V. Popp, Professor Emeritus of Economics New Mexico State University Las Cruces, NM
Domestic Production Activities Deduction and U.S. Employment
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Table of Contents Section Title Page
Table of Contents i List of Tables ii Executive Summary iii
1 Introduction 1 2 Which Industries are favored by the DPAD? 3 3 Which states are more affected by the DPAD? 5 4 Do states more affected by the DPAD also have higher unemployment rates? 6 5 Is the DPAD related to an increase in employment in DPAD-related industries over
time? 6
6 What are the tax treatments of the DPAD for state tax purposes in the various states, and how might the various state tax rates be affecting the effectiveness of the DPAD in those states?
8
7
Conclusions and Policy Implications References
10 12
List of Tables Table Title Page
1 DPAD/Domestic Taxable Income by Industry 4 2 Relative Importance of DPAD to each State 5 3 State DPAD Importance and Unemployment Rate 6 4 Industry DPAD Importance and Employment Change 7 5 State Tax Treatment of the DPAD 8
Domestic Production Activities Deduction and U.S. Employment
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The Domestic Production Activities Deduction and U.S. Employment
Pete V. Domenici Fellowship White Paper
Executive Summary
It is widely believed that taxing worldwide income, imposing a relatively high corporate
tax rate and allowing certain foreign income deferrals encourages the offshoring of U.S.
production. One policy alternative that might combat these effects is to extend and expand the
domestic production activities deduction (DPAD) provided for in Internal Revenue Code (IRC)
Section 199. The domestic production activities deduction (DPAD) offers an alternative to
across-the-board tax rate reduction that might be a more effective and less costly form of
corporate tax reform.
Little research on the DPAD has been done to date. Some unanswered questions remain
as to (1) which industries (including energy-related industries) are favored by the DPAD, and by
how much, (2) which states are more affected by the DPAD, (3) do the states more affected by
the DPAD also have higher unemployment rates, and (4) what are the tax treatments of the
DPAD for state tax purposes in the various states, and how might the various state tax rates be
affecting the effectiveness of the DPAD in those states. This study uses Bureau of Economic
Analysis, Census Bureau, and Checkpoint (a tax research program) data to investigate these
questions.
Which industries are favored by the DPAD?
In order to determine which industries are favored by the DPAD, the DPAD/Domestic
Taxable Income ratio was calculated for each industry for 2009. In 2009 the DPAD benefitted
the paper manufacturing industries more than all other industries. The next three industries
benefiting most were the publishing industry, motion picture and sound recording industries, and
electrical equipment, appliance, and component manufacturing industries. Oil and gas
extraction, an important industry to New Mexico and the nation, is combined with non-oil and
gas mining into one category, Mining, in the Statistics of Income (SOI) data. This industry had a
DPAD/DTI ratio of 0.040, a value just above the mean and median for all industries.
Which states are more affected by the DPAD?
In order to determine which states were most affected in 2009 by the DPAD, the
DPAD/DTI ratio for each industry was multiplied by the percent of a state’s GDP that came from
that industry. These products were added together for each state, giving a measure of the
DPAD/DTI ratio for each state. As would be expected, it appears that the DPAD favors states
whose GDP is more concentrated in the production of goods, such as Oregon (computer and
electronic product manufacturing), Louisiana (mining and petroleum products manufacturing),
and Wyoming (mining). States that do not benefit from the DPAD as much have economies that
are less dependent on producing goods, such as Nevada (real estate and accommodations),
Hawaii (real estate and retail trade), and Delaware (Federal Reserve banks, credit intermediation
and related services, and real estate).
Domestic Production Activities Deduction and U.S. Employment
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Do states more affected by the DPAD also have higher unemployment rates?
If a purpose of the DPAD is to reduce unemployment, then it would be most effective if it
is most used in states with higher unemployment rates. A simple correlation analysis was
performed to determine the relationship between the incidence of the DPAD in each state and
that state’s unemployment rate. A negative, but insignificant, correlation was found. This may
indicate that states with a higher incidence of DPAD also tend to have a slightly lower
unemployment rate.
Is the DPAD related to an increase in employment in DPAD-related industries over time?
The DPAD was first implemented in 2005 at a rate of three percent of domestic
production taxable income then, increased to six percent in 2007, and nine percent in 2010. The
incentive effects of the DPAD might be expected to result in an increase in the U.S. employment
totals in DPAD-intensive industries over time. The analysis indicated that the more important the
DPAD is to an industry (the higher the DPAD/DTI ratio is), the lower the increase in
employment in that industry over time, an inverse relationship. This would seem to indicate that
the DPAD is actually decreasing employment in the industries in which it is more important – a
counterintuitive result. However, it is more likely that the DPAD is actually targeting the
industries that it was intended to – those in which the U.S. continues to lose jobs. While it is
possible that the DPAD is reducing the job losses in these industries, the other factors (lower
costs and fewer regulations offshore, economic downturn) that are causing these losses are
apparently swamping any positive effect there might be from the DPAD.
What are the tax treatments of the DPAD for state tax purposes in the various states, and
how might the various state tax rates be affecting the effectiveness of the DPAD in those
states?
In all, 21 states conform to the U.S. Federal Income Tax treatment of the DPAD, and 23
states and the District of Columbia do not allow the DPAD as a deduction. Four states (Nevada,
South Dakota, Washington, and Wyoming) do not have a corporate tax against which the DPAD
can be used as a deduction. Given that the DPAD-related tax savings from the federal income tax
is not enough to impact the employment levels in various industries, it not likely that the DPAD-
related tax savings from the smaller state tax rates will have any measurable effect on
employment.
Policy Implications
The primary implication of this study is that in order to effectively offset the other factors
that contribute to offshoring, the DPAD percentage would need to be increased. A doubling of
the DPAD, as the president proposed for advanced manufacturing activities in the last State of
the Union address, would reduce the effective corporate tax rate on such income to 28.7 percent -
close to the 28 percent rate to which Mitt Romney is proposing to reduce the top marginal
corporate tax rate, and close to the top rate suggested by the Simpson-Bowles Commission. This
would seem to be an area in which compromise might be reached.
Domestic Production Activities Deduction and U.S. Employment
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Another policy implication of this study is that it illuminates some of the problems
inherent in reducing rates in order to accomplish policy objectives. The reduction of overall
corporate tax rates in order to encourage production in the U.S., without related reductions in
other deductions, would be very expensive from a budget point of view, but might not result in
the desired outcome of reducing offshoring.
The fact that there are so many states that don’t allow the DPAD as a deduction for state
income taxes probably reduces its effectiveness. States that don’t allow the DPAD should
consider making the appropriate changes to allow it.
Domestic Production Activities Deduction and U.S. Employment
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The Domestic Production Activities Deduction and U.S. Employment
Pete V. Domenici Fellowship White Paper
1. Introduction
It is widely believed that taxing worldwide income, imposing a relatively high corporate
tax rate and allowing certain foreign income deferrals encourages the offshoring of U.S.
production. One policy alternative that might combat these effects is to extend and expand the
domestic production activities deduction (DPAD) provided for in Internal Revenue Code (IRC)
Section 199. Section 199 allows for the deduction of a percentage (currently nine percent) of
taxable income from domestic production activities, and its expansion would provide the U.S. an
opportunity to enact effective corporate rate reductions that are targeted to U.S. producers. In his
2012 State of the Union address President Obama indicated that he would focus on the DPAD
and double it for advanced manufacturing technologies.
Amid growing calls for reform of the corporate income tax, a number of reports have
surfaced comparing the U.S. marginal corporate tax rate to those in other countries around the
world. When Japan lowered its corporate tax rate in April of 2011, the U.S. corporate tax rate of
39.2 percent officially became the highest marginal corporate tax rate in the OECD. In fact, this
is the 20th year in a row that the U.S. marginal corporate tax rate has been higher than the OECD
average (Hodge, 2011). Moreover, a recent study from the CATO Institute estimates that the
current U.S. marginal effective corporate tax rate is around 34.6 percent. (Chen and Mintz,
2011).
Countering these reports are studies that point out that the average effective corporate
rate in the United States is relatively low. A recent New York Times article cites the fact that out
of the 500 companies in the S&P index, 115 paid a total corporate tax rate of less than 20 percent
over the past five years (Leonhardt, 2011). In May 2011, the Boston Globe reported that more
than 25 percent of the 112 profitable publicly traded companies in Massachusetts either paid no
tax or received refunds for the 2010 tax year (Healy, 2011). Many companies claim that their tax
rates are artificially low in recent years due to tax breaks from recently enacted legislation.
Because of the high level of variation in tax burden from one year to the next, recent research
finds that looking at cash taxes paid over several years is a better estimate of tax burden than a
one-year point estimate (Dyreng et al., 2008).
One contributing factor to low average effective corporate tax rates is that over the past
several decades U.S. multinational corporations (U.S. MNCs) have shifted a substantial amount
of business activity offshore.1 As an increasing number of companies choose to offshore
operations, jobs continue their exodus from the U.S. During the 2000s, U.S. MNCs increased
employment in offshore operations by 2.4 million, while cutting workforces domestically by 2.9
million (Wessel, 2011). The result has been a substantial exodus of manufacturing jobs in
particular from the U.S. to foreign locations. Andy Grove, former CEO of Intel, notes that
1 U.S. MNCs shift income offshore for a variety of reasons. In some cases, they may be seeking to expand into
foreign consumer markets. Oftentimes, however, they shift production activities offshore to take advantage of lower
labor and regulatory costs and to benefit from lower corporate tax rates.
Domestic Production Activities Deduction and U.S. Employment
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manufacturing employment in the American computer industry is smaller today than it was
before the first personal computer was manufactured in 1975 (Grove, 2010).
In December of 2010 the Simpson-Bowles Commission recommended reducing the
corporate tax rate to somewhere between 23 percent and 29 percent, as well as switching to a
territorial rather than a worldwide tax system. After President Obama called for lowering the
corporate tax rate in his State of the Union address in January of 2011, a bipartisan plan put forth
by Ron Wyden and Dan Coats in February of 2011 suggested decreasing the corporate rate to 24
percent2. More recently, House Budget Committee Chairman Paul Ryan (and the Republican
nominee for vice president) proposed lowering the corporate tax rate to 25 percent as part of a
larger budget resolution.
The domestic production activities deduction (DPAD) offers an alternative to across-the-
board tax rate reduction that might be a more effective and less costly form of corporate tax
reform. Internal Revenue Code (IRC) Section 199 (introduced by the American Jobs Creation
Act of 2004) allows for the deduction of a percentage of taxable income derived from domestic
production activities. This provision reduces the effective corporate tax rate on income generated
by domestic production activities, but the currently available deduction of nine percent of
qualified taxable income only reduces the effective tax rate on domestic production income by
just over three percentage points. Expansion of the DPAD would provide Congress an
opportunity to target proposed rate reductions to domestic producers and create stronger
incentives for U.S. MNCs to relocate production to the United States. 3
Morrow, et al., (2011) suggest that selectively reducing the corporate tax rate on
domestic business activity by increasing the DPAD offers a number of advantages. Expanding
the DPAD reduces the cost advantages associated with offshoring production activity.
Moreover, it does so without driving down domestic wages and without relaxing important
environmental, worker safety, and other regulatory controls. Further, focusing the rate reduction
on domestic production activity has the potential to more cheaply attract businesses to the U.S.
than an across-the-board rate reduction would. It could substantially increase federal revenues
by increasing corporate tax revenue (if it drew enough business back to the U.S.). In addition to
possibly increasing corporate tax revenue, every dollar of additional domestic wage income
increases payroll and individual income tax revenues to both federal and state governments, and
local governments would benefit from additional income, property and sales taxes. It is
estimated that resulting increases in individual tax revenues could be sufficiently large so that the
net revenue effect would be positive under various plausible assumptions regarding the amount
of increased domestic production activity stimulated by the proposed change.
However, little research on the DPAD has been done to date. Some unanswered
questions remain as to (1) which industries (including energy-related industries) are favored by
the DPAD, and by how much, (2) which states are more affected by the DPAD, (3) do the states
more affected by the DPAD also have higher unemployment rates, and (4) what are the tax
treatments of the DPAD for state tax purposes in the various states, and how might the various
2 This proposal was previously sponsored by Judd Gregg and Ron Wyden. Judd Gregg chose not to run for re-
election in 2010. 3 The WTO has not challenged the DPAD since its 2004 inception.
Domestic Production Activities Deduction and U.S. Employment
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state tax rates be affecting the effectiveness of the DPAD in those states. This study uses Bureau
of Economic Analysis, Census Bureau, and Checkpoint (a tax research program) data to
investigate these questions.
2. Which industries are favored by the DPAD?
This question was investigated by analyzing tax return data provided in the Internal
Revenue Service publication Corporation Income Tax Returns (Statistics of Income-2009).
Table 17 of this publication provides tax return data for all corporations with taxable income in
2009, and the data is segregated by the industry in which the corporation does business. In
particular, it provides totals by industry for the DPAD and for taxable income. In order to
determine which industries are favored by the DPAD, the DPAD/Domestic Taxable Income ratio
was calculated for each industry for 2009. Domestic taxable income (DTI) is used to standardize
the industry DPAD amounts because the DPAD is only available for domestic production. The
resulting ratio will vary depending on how much of the domestic taxable income for each
industry is eligible for the DPAD. Domestic taxable income is not explicitly given in the
Statistics of Income (SOI) data, so it was estimated by multiplying taxable income by [(total tax
liability – foreign tax credit)/total tax liability] for each industry. Since (total tax liability –
foreign tax credit) gives an estimate of the U.S. tax on domestic taxable income, dividing that
number by total tax liability will give an estimate of the fraction of total income that consists of
domestic income. Table 1, below, provides the results. In 2009, the DPAD benefitted the paper
manufacturing industries more than all other industries. The next three industries benefiting
most were the publishing industry, motion picture and sound recording industries, and electrical
equipment, appliance, and component manufacturing industries.
Oil and gas extraction, an important industry to New Mexico and the nation, is combined
with non-oil and gas mining into one category, Mining, in the SOI data. This industry had a
DPAD/DTI ratio of 0.040, a value just above the mean and median for all industries.
Domestic Production Activities Deduction and U.S. Employment
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BEA ID Industry DPAD/DTI BEA ID Industry DPAD/DTI BEA ID Industry DPAD/DTI
129 Paper manufacturing 0.089 111 Construction 0.042 135 Retail trade 0.003
146Publishing industries,
except Internet0.082 127
Textile mills and
textile product mills0.041 163
Administrative and
waste management
services
0.003
147
Motion picture and
sound recording
industries
0.08 130Printing and related
support activities0.041 151
Federal Reserve
banks, credit
intermediation and
related services
0.002
120
Electrical equipment,
appliance, and
component
manufacturing
0.076 106 Mining 0.04 168Ambulatory health
care services0.002
119
Computer and
electronic product
manufacturing
0.066 110 Utilit ies 0.033 170 Social assistance 0.001
131
Petroleum and coal
products
manufacturing
0.06148,
149
Broadcasting and
telecommunications
Information and data
processing services
0.033 162
Management of
companies and
enterprises
0.001
117
Fabricated metal
product
manufacturing
0.057 132Chemical
manufacturing0.026 143
Other transportation
and support
activities
0.001
115
Nonmetallic mineral
product
manufacturing
0.056 105Forestry, fishing, and
related activities0.017 154
Funds, trusts, and
other financial
vehicles
0.001
133
Plastics and rubber
products
manufacturing
0.055 158
Professional,
scientific, and
technical services
0.014 140 Truck transportation 0.001
126
Food and beverage
and tobacco product
manufacturing
0.055 134 Wholesale trade 0.013 152
Securities,
commodity
contracts,
investments
0.001
124Miscellaneous
manufacturing0.053 157
Rental and leasing
services and lessors of
intangible assets
0.01137,
138, 139Air transportation 0
116Primary metal
manufacturing0.052 176
Food services and
drinking places0.009 153
Insurance carriers
and related activities0
114Wood product
manufacturing0.05 172
Performing arts,
spectator sports,
museums, and related
services
0.008 142Pipeline
transportation0
123
Furniture and related
product
manufacturing
0.05 175 Accommodation 0.006 156 Real estate 0
118Machinery
manufacturing0.05 144
Warehousing and
storage0.006 169
Hospitals and nursing
and residential care
facilit ies
0
104Crop and animal
production (Farms)0.048 128
Apparel and leather
and allied product
manufacturing
0.006 173
Amusement,
gambling, and
recreation
0
121, 122
Motor vehicle, body,
trailer, and parts
manufacturing
0.048 166 Educational services 0.004 141
Transit and ground
passenger
transportation
0
Table 1 – DPAD/Domestic Taxable Income by Industry
Domestic Production Activities Deduction and U.S. Employment
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3. Which states are more affected by the DPAD?
In order to determine which states were most affected in 2009 by the DPAD, the
DPAD/DTI ratio for each industry was multiplied by the percent of a state’s GDP that came from
that industry. These products were added together for each state, giving a measure of the
DPAD/DTI ratio for each state.
As would be expected, it appears that the DPAD favors states whose GDP is more concentrated
in the production of goods, such as Oregon (computer and electronic product manufacturing),
Louisiana (mining and petroleum products manufacturing), and Wyoming (mining). States that
do not benefit from the DPAD as much have economies that are less dependent on producing
goods, such as Nevada (real estate and accommodations), Hawaii (real estate and retail trade),
and Delaware (Federal Reserve banks, credit intermediation and related services, and real estate).
StateGDP/industry-
weighted DPADState
GDP/industry-weighted
DPAD
Oregon 0.0266 Nebraska 0.0165
Louisiana 0.0253 United States 0.0163
Wyoming 0.0238 South Dakota 0.0161
Indiana 0.0204 Tennessee 0.0161
Texas 0.0199 Michigan 0.0161
Oklahoma 0.0197 Georgia 0.0160
Washington 0.0197 Missouri 0.0159
Idaho 0.0194 New Hampshire 0.0159
Alaska 0.0192 Vermont 0.0156
Iowa 0.0192 Montana 0.0155
Mississippi 0.0191 Massachusetts 0.0153
Arkansas 0.0189 Pennsylvania 0.0151
Wisconsin 0.0189 Illinois 0.0149
North Dakota 0.0188 Virginia 0.0147
Kentucky 0.0187 Maine 0.0142
Alabama 0.0186 Arizona 0.0137
Kansas 0.0184 Maryland 0.0128
North Carolina 0.0182 Connecticut 0.0125
New Mexico 0.0180 New York 0.0123
South Carolina 0.0178 New Jersey 0.0119
California 0.0174 Rhode Island 0.0118
Utah 0.0171 Florida 0.0116
West Virginia 0.0169 Nevada 0.0113
Minnesota 0.0169 Hawaii 0.0106
Ohio 0.0166 Delaware 0.0092
Colorado 0.0166
Table 2 – Relative Importance of DPAD to Each State
Domestic Production Activities Deduction and U.S. Employment
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4. Do states more affected by the DPAD also have higher unemployment rates?
The purpose of the DPAD when enacted was to increase the production of goods and
services in the U.S. (as opposed to offshoring that production), increasing U.S. GDP and
reducing U.S. unemployment. If a purpose of the DPAD is to reduce unemployment, then it
would be most effective if it is most used in states with higher unemployment rates. Table 3
provides information on the importance of the DPAD in each state and the related unemployment
rate in that state. A simple correlation analysis was performed to determine the relationship
between the incidence of the DPAD in each state and that state’s unemployment rate. A negative,
but insignificant, correlation was found. This may indicate that states with a higher incidence of
DPAD also tend to have a slightly lower unemployment rate.
5. Is the DPAD related to an increase in employment in DPAD-related industries
over time?
The DPAD was first implemented in 2005 at a rate of three percent of domestic production
taxable income then, increased to six percent in 2007, and nine percent in 2010. The incentive
effects of the DPAD might be expected to result in an increase in the U.S. employment totals in
DPAD-intensive industries over time. To investigate this relationship, the percentage increase in
U.S. employment from 2003 to 2009 was computed for each industry. A correlation analysis
was done between the DPAD/DTI and the Employment Change variables, and it was found that
Alabama 0.0186 9.9 Louisiana 0.0253 6.6 Ohio 0.0166 10.1
Alaska 0.0192 7.7 Maine 0.0142 8.1 Oklahoma 0.0197 6.7
Arizona 0.0137 9.9 Maryland 0.0128 7.4 Oregon 0.0266 11.1
Arkansas 0.0189 7.5 Massa-chusetts 0.0153 8.2 Pennsylvania 0.0151 8
California 0.0174 11.3 Michigan 0.0161 13.4 Rhode Island 0.0118 10.9
Colorado 0.0166 8.1 Minnesota 0.0169 8 South Carolina 0.0178 11.5
Connecti-cut 0.0125 8.2 Mississippi 0.0191 9.4 South Dakota 0.0161 5.2
Delaware 0.0092 7.9 Missouri 0.0159 9.4 Tennessee 0.0161 10.5
Florida 0.0116 10.4 Montana 0.0155 6.1 Texas 0.0199 7.5
Georgia 0.0160 9.8 Nebraska 0.0165 4.7 United States 0.0163 9.9
Hawaii 0.0106 6.9 Nevada 0.0113 11.6 Utah 0.0171 7.6
Idaho 0.0194 7.4New
Hampshire0.0159 6.2 Vermont 0.0156 6.9
Illinois 0.0149 10 New Jersey 0.0119 9 Virginia 0.0147 6.9
Indiana 0.0204 10.4 New Mexico 0.0180 6.8 Washington 0.0197 9.4
Iowa 0.0192 6.2 New York 0.0123 8.3 West Virginia 0.0169 7.7
Kansas 0.0184 7.2 North Carolina 0.0182 4.1 Wisconsin 0.0189 8.7
Kentucky 0.0187 10.3 North Dakota 0.0188 5 Wyoming 0.0238 6.3
Table 3 – State DPAD Importance and Unemployment Rate
State
DPAD
Impor-
tance
2009
Unemploy-
ment Rate
State
DPAD
Impor-
tance
2009
Unemploy-
ment Rate
State
DPAD
Impor-
tance
2009
Unemploy-
ment Rate
Domestic Production Activities Deduction and U.S. Employment
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these two variables are negatively correlated, with a correlation coefficient of -0.49799
(p=0.0002). This indicates that the more important the DPAD is to an industry (the higher the
DPAD/DTI ratio is), the lower the increase in employment in that industry over time. This
would seem to indicate that the DPAD is actually decreasing employment in the industries in
which it is more important – a counterintuitive result. However, it is more likely that the DPAD
is actually targeting the industries that it was intended to – those for which the U.S. continues to
lose jobs. While it is possible that the DPAD is reducing the job losses in these industries, the
other factors (lower costs and fewer regulations offshore, economic downturn) that are causing
these losses are apparently swamping any positive effect there might be from the DPAD.
Table 4 – Industry DPAD Importance and Employment Change
BEA
Id Industry Name
DPAD/
DTI
Employ-
ment
Change
BEA
Id Industry Name
DPAD/
DTI
Employ-
ment
Change
104 Crop and animal
production (Farms) 0.0481 -6.10% 140 Truck transportation 0.0006 1.88%
105 Forestry, fishing,
and related activities 0.0168 7.80% 141
Transit and ground
passenger transportation
0.0000 13.25%
106 Mining 0.0397 47.97% 142 Pipeline transportation
0.0002 5.74%
110 Utilities 0.0330 -0.72% 143 Other transportation
and support activities 0.0008 0.16%
111 Construction 0.0418 -10.14% 144 Warehousing and
storage 0.0060 25.59%
114 Wood product manufacturing
0.0500 -32.70% 146 Publishing industries, except Internet
0.0817 -13.12%
115
Nonmetallic mineral
product manufacturing
0.0563 -23.82% 147
Motion picture and
sound recording industries
0.0799 1.69%
116 Primary metal
manufacturing 0.0523 -22.18%
148,14
9
Broadcasting and
telecommunications
Information and data processing services
0.0329 -11.90%
117
Fabricated metal
product manufacturing
0.0567 -11.60% 151
Federal Reserve banks, credit
intermediation and
related services
0.0022 -2.79%
118 Machinery
manufacturing 0.0496 -12.20% 152
Securities,
commodity contracts, investments
0.0006 73.36%
119
Computer and
electronic product
manufacturing
0.0660 -17.59% 153 Insurance carriers and related activities
0.0002 3.78%
120
Electrical
equipment,
appliance, and component
manufacturing
0.0762 -20.84% 154
Funds, trusts, and
other financial vehicles
0.0007 117.35%
Domestic Production Activities Deduction and U.S. Employment
8
121, Motor vehicle, body,
trailer, and parts
manufacturing
0.0477 -23.99% 156 Real estate 0.0002 29.88%
122
123
Furniture and related
product
manufacturing
0.0498 -34.53% 157
Rental and leasing
services and lessors
of intangible assets
0.0098 -12.51%
124 Miscellaneous manufacturing
0.0531 -7.06% 158
Professional,
scientific, and
technical services
0.0141 14.21%
126
Food and beverage
and tobacco product manufacturing
0.0546 -3.33% 162
Management of
companies and enterprises
0.0013 15.11%
127 Textile mills and textile product mills
0.0409 -43.80% 163
Administrative and
waste management
services
0.0027 7.39%
128 Apparel and leather and allied product
manufacturing
0.0057 -37.99% 166 Educational services 0.0037 23.99%
129 Paper manufacturing 0.0891 -23.46% 168 Ambulatory health care services
0.0021 24.65%
130 Printing and related
support activities 0.0408 -22.10% 169
Hospitals and nursing and residential care
facilities
0.0002 10.51%
131
Petroleum and coal
products manufacturing
0.0602 -1.39% 170 Social assistance 0.0014 21.46%
132 Chemical manufacturing
0.0260 -11.75% 172
Performing arts,
spectator sports, museums, and related
services
0.0080 17.81%
133 Plastics and rubber products
manufacturing
0.0551 -24.14% 173 Amusement, gambling, and
recreation
0.0000 11.48%
134 Wholesale trade 0.0129 -0.30% 175 Accommodation 0.0062 -0.30%
135 Retail trade 0.0028 -2.58% 176 Food services and
drinking places 0.0088 9.69%
137, 138,
139
Air transportation 0.0002 -13.34%
6. What are the tax treatments of the DPAD for state tax purposes in the various
states, and how might the various state tax rates be affecting the effectiveness of
the DPAD in those states?
Table 5 contains data on the treatment of the DPAD in the various states. In all, 21 states
conform to the U.S. Federal Income Tax treatment of the DPAD, and 23 states and the District of
Columbia do not allow the DPAD as a deduction. Four states (Nevada, South Dakota,
Washington, and Wyoming) do not have a corporate tax against which the DPAD can be used as
a deduction. Kentucky only allows a reduced DPAD of six percent, and Virginia only allows a
Domestic Production Activities Deduction and U.S. Employment
9
reduced six percent DPAD until 2013, after which time a nine percent DPAD will be allowed.
Given that the DPAD-related tax savings from the federal income tax is not enough to impact the
employment levels in various industries, it not likely that the DPAD-related tax savings from the
smaller state tax rates will have any measurable effect on employment. In fact, many of the
states that don’t allow the DPAD as a deduction are the states with higher income tax rates
(California, Washington D.C., Maine, Minnesota, New Jersey), and a number of the states that
do allow it are the states with lower income tax rates (Arizona, Colorado, Florida, Utah). This
combination of associations also makes it unlikely that DPAD-related state corporate income tax
savings will have much effect on employment in the various industries or states.
Table 5 – State Tax Treatment of the DPAD
State Conforms to Federal
Maximum Corp. Rate
Notes, Citations
Alabama Y 6.5%
Alaska Y 9.4%
Arizona Y 6.5%
Arkansas N 6.5%
California N 8.84% No deduction is allowed for the DPAD.
Colorado Y 4.63%
Connecticut N 7.5% For years beginning on or after January 1, 2009, the DPAD is disallowed. [Conn. Gen. Stat. §12-217(a)(1).]
Delaware Y 8.7%
District of Columbia
N 9.975% No deduction is allowed for the DPAD. [D.C. Code Ann. §47-1803.03(a-1).]
Florida Y 5.5%
Georgia N 6% No deduction is allowed for the DPAD. [Ga. Code Ann. §48-1-2(14); Ga. Code Ann. §48-1-2(14.2).]
Hawaii N 6.4% No deduction is allowed for the DPAD. [Haw. Rev. Stat. §235-2.3(b)(14); Hawaii Dept. of Taxation Announcements 2005-12, 08/03/2005.]
Idaho Y 7.4%
Illinois Y 7%
Indiana N 8% No deduction is allowed for the DPAD. [Ind. Code §6-3-1-3.5(b)(8).]
Iowa Y 12%
Kansas Y 7%
Kentucky Y/N 6% For taxable years beginning on or after January 1, 2010, Kentucky limits the deduction percent to 6% (rather than 9%). [Ky. Rev. Stat. Ann. §141.010(13)(c); Ky. Rev. Stat. Ann. §141.010(13)(d).]
Louisiana Y 8%
Maine N 8.93% No deduction is allowed for the DPAD. [Me. Rev. Stat. Ann.36 §5200-A(1)(S); Instructions to Form 1120-ME.]
Maryland N 8.25% No deduction is allowed for the DPAD. [Md. Code Ann. Tax-Gen. §10-305(d)(4) .]
Massachusetts N 8% No deduction is allowed for the DPAD. [Mass. Gen. L.Chapter 63 §1; Mass. Gen. L.Chapter 63 §30(4).]
Michigan N 6% No deduction is allowed for the DPAD. [Mich. Comp. Laws Ann. §206.607(1); Corporate Income Tax FAQ—Corporate Tax Base 1, 11/22/2011.] Michigan Business Tax. No deduction is allowed for the DPAD. [Mich. Comp. Laws Ann. §208.1109(3); Michigan Business Tax FAQ B44, 08/26/2009; Michigan Business Tax FAQ M68, 08/26/2009.]
Minnesota N 9.8% No deduction is allowed for the DPAD. [Minn. Stat. §290.01, Subd. 19c(17).]
Mississippi N 5% No deduction is allowed for the DPAD.
Missouri Y 6.25%
Montana Y 6.75%
Nebraska Y 7.81%
Nevada NCT
New Hampshire N 8.5% No deduction is allowed for the DPAD. [N.H. Rev. Stat. Ann. §77-A:1, XX(l).]
New Jersey N 9% No deduction is allowed for the DPAD. [N.J. Rev. Stat. §54:10A-4(k)(2)(J)., N.J. Admin. Code §18:7-5.2(a)(1)(xx).]
New Mexico Y 7.6%
Domestic Production Activities Deduction and U.S. Employment
10
New York N 7.1% Effective January 1, 2008, no deduction is allowed for the DPAD. [N.Y. Tax Law §208(9)(b)(19); N.Y. Tax Law §210(1)(a); N.Y. Tax Law §210(3)(d); NYCRR20 §3-2.2(b).]
North Carolina N 6.9% No deduction is allowed for the DPAD. [N.C. Gen. Stat. §105-130.5(a)(17) .]
North Dakota N 5.15% No deduction is allowed for the DPAD. [N.D. Cent. Code §57-38-01.3(1).]
Ohio Y 8.5%
Oklahoma Y 6%
Oregon N 7.6% No deduction is allowed for the DPAD. [Or. Rev. Stat. §317.398.]
Pennsylvania Y 9.99%
Rhode Island Y 9%
South Carolina N 5% No deduction is allowed for the DPAD. [S.C. Code Ann. §12-6-50(7), S.C. Code Ann. §12-6-1130(13).]
South Dakota NCT
Tennessee N 6.5% No deduction is allowed for the DPAD. [Tenn. Code Ann. §67-4-2006(b)(1)(L).]
Texas N 1% of taxable margin
No deduction is allowed for the DPAD. [Tex. Tax Code Ann. §171.1011(c)(1); Tex. Admin. Code34 §3.587(d)(1).]
Utah Y 5%
Vermont Y 8.5%
Virginia Y/N 6% Virginia treatment. For tax years 2010, 2011, and 2012, Virginia allows only 2/3 of the IRC §199 deduction, or 6%. For taxable years beginning on or after January 1, 2013, the 9% rate can be used. [Va. Code Ann. §58.1-402; Va. Code Ann. §58.1-301(B)(5) ; Virginia Tax Bulletin 12-1, 02/09/2012.]
Washington NCT
West Virginia N 7.75% No deduction is allowed for the DPAD. [W. Va. Code §11-24-6a.]
Wisconsin N 7.9% For tax years beginning after December 31, 2008, no deduction is allowed for the DPAD. [Wis. Stat. §71.22(4)(um); Wisconsin Dept. Rev. Tax Bulletin 162, 07/01/2009.]
Wyoming NCT
NCT = No corporate tax in the state.
7. Conclusions and Policy Implications
Consistent with its purpose when enacted, the DPAD (as shown in Table 1) appears to be deducted
most heavily in those industries that are more related to production, and less related to the providing of
services. Table 2 shows that the DPAD benefits some states, such as Oregon, Louisiana and Wyoming,
much more on a relative basis than it benefits other states that depend more heavily on services, such as
Nevada, Hawaii, and Delaware. Unfortunately the states that benefit most (on a relative basis) from the
DPAD are not the states with the highest unemployment rates. A negative, but insignificant, correlation
was found between the importance of the DPAD to a state and the unemployment rate in that state.
However, it should be noted that while it might be more desirable for the DPAD and unemployment rates
in the states to be positively correlated, this was not an explicit goal of the DPAD when enacted.
This study also compared the measure of importance of the DPAD to an industry (DPAD/DTI) in
2009 to that industry’s percent growth in employment over the time period 2003-2010 in order to see if
the DPAD had, in fact, had a positive effect on employment in those industries. However, the
DPAD/DTI ratio was actually negatively (correlation coefficient = -0.48799) and very highly (p=0.0002)
correlated with employment increases/decreases in an industry, indicating that the factors that already
contribute to offshoring of production may continue to more than offset the tax savings from the DPAD.
Twenty-one states allow the same DPAD deduction to corporate taxable income that the U.S. tax
code allows. However, 23 states allow no DPAD deduction at all, and some of those states have
relatively higher state income tax rates. A deduction against income at these higher tax rates presumably
would provide more of an incentive to increase production in these states than would a comparable
deduction in low tax states.
Domestic Production Activities Deduction and U.S. Employment
11
Policy Implications. The policy implications of this study are as follows:
1. The primary implication of this study is that in order to effectively offset the other factors that
contribute to offshoring, the DPAD percentage would need to be increased. As currently
constituted, the DPAD is not successful in preventing offshoring in production industries. Even
at a deduction rate of nine percent, the DPAD is only equivalent to a tax rate reduction of 3.15
percent (9% DPAD X 0.35 marginal tax rate = 3.15%). This effectively brings the maximum
U.S. tax rate on U.S. productive activities down to 35-3.15 = 31.85%. A doubling of the DPAD,
as the president proposed for advanced manufacturing activities in the last State of the Union
address, would reduce the effective corporate tax rate on such income to 28.7 percent – close to
the 28 percent rate to which Mitt Romney is proposing to reduce the top marginal corporate tax
rate, and close to the top rate suggested by the Simpson-Bowles Commission. This would seem
to be an area in which compromise might be reached.
2. Another policy implication of this study is that it illuminates some of the problems inherent in
reducing rates in order to accomplish policy objectives. The reduction of overall corporate tax
rates in order to encourage production in the U.S., without related reductions in other deductions,
would be very expensive from a budget point of view, but might not result in the desired outcome
of reducing offshoring. A targeted “rate reduction” such as the DPAD might be a more effective
means of accomplishing this policy objective.
3. The fact that there are so many states that don’t allow the DPAD as a deduction for state income
taxes probably reduces its effectiveness. States that don’t allow the DPAD should consider
making the appropriate changes to allow it. If the state tax rate is eight percent, for example,
allowance of the DPAD is equivalent to a tax rate reduction of .72 percent (8% X 9% DPAD rate
= 0.72%). This is approximately 23 percent of the effective rate reduction from the federal
DPAD deduction – a significant amount.
Domestic Production Activities Deduction and U.S. Employment
12
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