With
Michigan last week replacing its business tax, 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.
Four years ago only 29 percent of the U.S. economy, represented by 16
states used combined reporting. Now including Michigan, 51 percent of
the economy will now take place in states using combined reporting.
“This is the tipping point,” said Johanna Neumann policy advocate for
Maryland PIRG. “Combined reporting has become standard best practice.
This is a day that everyone but a few tax lawyers 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
elaborate transactions between subsidiaries to hide reportable income.
Like the earlier method, combined reporting also only taxes companies
based on their in-state business activity.
For many years combined reporting was stymied by lawsuits, and then by lobbying by corporations
that benefit from tax loopholes. But the landscape has shifted.
According to Michael Mazerov at the D.C.-based Center for Budget and
Policy Priorities, "When the Supreme Court upheld California's use of
combined reporting back in 1983, it was still considered an innovative
and controversial approach to taxing corporations. Now it is just
becoming standard best practice"
Governors this year proposed combined reporting in six states and
legislation was introduced in three others. This year, it has so-far
passed in Michigan, New York, and West Virginia. A model statute for
combined reporting has been drawn up by the Multistate Tax Commission,
a quasi public body comprised of state revenue departments.
States have tried to close some loopholes one at a time, but can’t keep
up with the tax lawyers who invent new ones much faster. “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,” said Neumann.
