Combined Reporting is a Good Idea

by: Andrew Kujan

Wed Jul 25, 2007 at 01:38 PM EDT

Update: It turns out that a majority of Marylanders agree, increasing taxes on the wealthy and corporations is the solution to closing our budget deficit.

Update 2: Maryland PIRG has been active on this issue for a while now, lobbying and training State Officals on the benefits of combined reporting.  I was contacted today by Maryland PIRG and they informed me that to the list of States using combined reporting I can add Michigan, Texas and Ohio.  As my contact pointed out, due to the size of these state's economies, this means that "the majority of the US Economy uses combined reporting." 

To expand on the importance of Combined Reporting:

"The beauty of combined reporting is that it closes a thousand loopholes at once. Moving money from one corporate pocket to another becomes irrelevant for tax purposes."

Thanks to Phineas Baxandall and US PIRG for the information in this update.  

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Every day it seems we are greeted with a new possible solution to Maryland's budget woes.  Well, Combined Reporting seems like a good start. One of the problems Maryland faces concerning corporate taxes is that half of the most powerful corporations in the state do not pay income taxes.  Many avoid doing so by stashing significant profits (profits made in Maryland) in coffers inside nearby states where the corporate income tax is much lower.  

 The Sun does a rather poor job of explaining how combined reporting really defeats this practice, so I will defer to the economists at the New Rules Project, an organization dedicated to protecting local business and local economies.

Combined reporting requires that companies combine profits from all related subsidiaries before determining what portion of their profits are taxable in that state. (To determine how much of their total earnings are taxable in each state in which they operate, multi-state companies must apportion their profits according to formulas which consider how much of the firm's property, payroll, and sales are in each state.)

 

 

States with combined reporting are effectively able to tax the percentage of an out-of-state subsidiary's profits that can legitimately be attributed to a firm's in-state operations. Combined reporting has been upheld by the U.S. Supreme Court.

I can think of no good reason why corporations should be able to avoid paying taxes on income that has been collected in Maryland, particularly when this same luxury is rarely available to individual taxpayers and small business owners.    

But is combined reporting unfair?  I would say that in Maryland, it is anything but.  For example, check out "Table 1" in this article from the Center on Budget and Policy Priorities. Compared to many seemingly red states, Maryland collects very little of its total income tax from corporations.  Only 4.2% of our total income taxes in 2000 came from corporate income tax.  This mirrors a general decline in corporate income tax collection across the country since the late 70's.  

For anyone to claim that increasing that percentage would be out of the norm, or that such a move would be "radical" is simply not telling the truth.  Maryland could increase the amount of corporate income tax we collect every year and still be mighty attractive to corporate business.

Nearly 20 states have combined reporting laws of some sort. Despite what the corporate lap dogs at the Maryland Chamber of Commerce have to say, combined reporting increases entrepreneurship (PDF).  A recent study by members of the US Small Business Administration found that:

States with combined reporting and throwback rules as part of their corporate income taxes tend to have higher entrepreneurship rates. These effects are above and beyond  changes in organizational form among small businesses.

So the only thing that is bad for business in this case, are corporate businesses shrifting the State and it's citizens of taxes they deserve.  Lets hope Maryland passes combined reporting of corporate profits ASAP.