Florida Behind in
Loophole-Closing Reform that may soon Cover Most of U.S.
Economy
States across the nation have begun a little-noticed
movement to level the playing field on business taxes. A growing chorus of
governors have called for an end to the elaborate shell games that some
businesses play with out-of-state subsidiaries to avoid state taxes. These
schemes leave in-state businesses that must pay full taxes at a competitive
disadvantage.
In the past two months governors in at least five states
and legislative bills in at least four others, have proposed to join 18 other
states that have decided to bypass tricky tax-avoidance transactions between
subsidiaries by requiring affiliated firms to file taxes together and pay taxes
based on their combined in-state business activity.
“States have been duped by the tax shell game long
enough,” said Phineas Baxandall, Senior Analyst for Tax and Budget Policy for
Florida PIRG and U.S. PIRG, the federation of state PIRGs. “Years from now
people will shake their heads that states ever tried to collect taxes the old
way.”
Governors in Michigan,
Iowa, Massachusetts, New York,
and Pennsylvania have proposed this modernization
in their recent budgets. In numerical terms, this could be the year that
combined reporting covers a majority of the nation’s state taxes on business. In
2004 the states with combined reporting still represented less than 29 percent
of the nation’s total gross domestic product.
If Governors Granholm, Culver, Patrick, Spitzer, and
Rendell have their way, that number will double to almost 60 percent in 2008.
And if the bills pending in four other state legislatures become law, combined
reporting could cover almost two-thirds of the
economy.
Over half of US states, generally those with smaller
economies, still use the earlier system crafted in an era when few companies
operated across state lines. If New York enacts combined reporting, Florida will be the only
large state economy not to modernize its business taxes. California was the first
state in 1937 to enact combined reporting.
Now, the trickle of states adopting this tax
modernization may have reached a tipping point. In the last two years Texas, Vermont, and
Ohio adopted
combined reporting in their business taxes. The Texas rule begins in 2008. In addition to the
five governors already this year, legislation has also been filed for combined
reporting in Maryland, New
Mexico, North Carolina, and
West
Virginia.
Governors and legislators are acting
now because of four factors:
- When multi-state
businesses fail to pay their taxes, regular households and companies without
high-priced accountants end up picking up the tab.
- Public opinion has
shifted post-Enron and WorldCom. In addition to these infamous meltdowns
related to tax avoidance, last month, a much-discussed expose in the Wall Street Journal described how 14
states are suing Wal-Mart for avoiding taxes by sending profits to a tax-free
real-estate trust owned by itself and its top brass.
- State economies
better prosper when companies succeed based on efficiency and innovation,
rather than their ability to avoid taxes.
- State attempts to
prohibit individual tax dodges instead of creating combined reporting have
failed to keep up with private tax lawyers’ ability to invent new loopholes.
States have learned that more systematic approaches are necessary because they
are outgunned by a growing industry of high-priced tax
consultants.
“Combined reporting will help
companies that pay their taxes but compete against multi-state companies that do
not,” says Baxandall. “This tax reform does away with a thousand tax loopholes
at once. As more states catch on, fewer companies will waste their time on sham
transactions and subsidiaries. This is a big step toward fairer state taxes and
fairer competition among business.”
