Massachusetts becomes 23rd state to
modernize with combined reporting
With Governor Deval Patrick signing the Tax Fairness Bill to
close corporate tax loopholes today, a
majority of the U.S. economy has now adopted a tax reform that was still
considered controversial only a few years ago. “Combined reporting,” as the tax
modernization is called, levels the playing field between businesses by
preventing companies from using out-of-state subsidiaries to avoid paying their
taxes.
Five years ago less than 30% of the U.S. economy,
represented by 16 states used combined reporting. Now including Massachusetts, over 55%
of the economy will take place in states using combined reporting.
“In the face
of tremendous opposition voiced by big businesses lobbying, the Governor, and
the legislature demonstrated true leadership and supported common sense reforms
reducing opportunities for tax avoidance and restoring fairness to our tax
system,” said Deirdre Cummings,
Legislative Director with MASSPIRG.
“This is part of a larger tipping point,” said Phineas Baxandall, Ph.D. of U.S.PIRG, the Federation
of State Public Interest Research Groups, which advocates for this reform. “Combined reporting has become standard best
practice. Aside from a few tax lawyers who will lose business on creating
complex tax dodges, this is a day that everyone should celebrate.”
Combined reporting was first introduced in California in 1937 as a way to adjust to the
fact that modern companies often operate across state lines. The practice
requires companies to file taxes in a single combined return, rather than
carving up activities into separate – often out of state – subsidiaries that
can avoid state taxes. Combined reporting eliminates any incentive to use
accounting schemes or fictional transactions between subsidiaries as a way to
hide reportable income. Combined reporting only taxes companies based on their
in-state business activity.
For decades combined reporting was stymied by lawsuits, and then by lobbying from corporations that benefit from tax loopholes. The landscape has
shifted as regulators and the public become more aware of tax-avoidance schemes
that favor out-of-state companies.
Texas, Ohio, and Michigan don’t levy corporate income taxes
but use combined reporting to assess taxes on their broad-based business taxes that
the states introduced in 2005, 2006 and 2007 respectively.
