Closing Corporate Tax Loopholes News

PITTSBURGH—Today, the House Finance Committee held a hearing on “combined reporting”, an accounting reform that would prevent multi-state companies from shifting profits to out-of-state subsidiaries as a way to avoid Pennsylvania taxes. Neighboring New York and West Virginia instituted this tax modernization last month.

Phineas Baxandall, Senior Analyst for Tax & Budget Policy for the Pennsylvania Public Interest Research group (PennPIRG), testified in favor of the proposed measure. “It levels the playing field between in-state companies and those that operate with subsidiaries across many states,” said Baxandall. “ Pennsylvania businesses should thrive based on their productivity and ability to innovate, not their opportunities for tax avoidance. We urge the General Assembly to pass Rep. Levdansky’s legislation, and make our tax system fairer for all Pennsylvanians.” For years, PennPIRG has been a leading advocate for combined reporting.

On May 1, 2007, House Finance Committee Chairman David Levdansky (parts of Allegheny and Washington Counties) introduced HB 1186 to institute “combined reporting.” Governor Ed Rendell has also long been a supporter of combined reporting.

Rep. Levdansky’s legislation is part of a growing national trend in state tax systems. In addition to recent enactment in New York and West Virginia, governors in Michigan, Iowa, North Carolina, and Massachusetts have joined Pennsylvania in proposing this modernization in their recent budgets. Legislation has also been filed for combined reporting in Maryland, New Mexico, and Missouri. In the previous two years this tax modernization was also instituted in Texas, Ohio, and Vermont.

The spread of combined reporting is even more pronounced, Baxandall pointed out, considering that it has passed in other large states similar to Pennsylvania. While back in 2004 the states with combined reporting represented less than 29 percent of the nation’s total gross domestic product, almost 62 percent of the domestic economy would be covered if Governors Granholm, Culver, Patrick, Easley, and Rendell have their way.1

Governors and legislators are acting now because of three 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, earlier this year, 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 attempts to prohibit individual tax dodges instead of creating a comprehensive combined reporting system have failed to keep up with private tax lawyers’ ability to invent new loopholes.

“This tax reform does away with a thousand tax loopholes at once,” said Baxandall. “As more states catch on, fewer companies will waste their time on sham transactions and fake subsidiaries. Years from now people will shake their heads that states ever tried to collect taxes the old way.”

 

The Pennsylvania Public Interest Research Group (PennPIRG) is a non-profit consumer advocacy group representing 3,500 citizen members across the state. PennPIRG has offices in Philadelphia and Harrisburg. For more information, visit www.pennpirg.org

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1. States using combined reporting for corporate income taxes in 2004 were as follows with percent of GDP listed: Alaska (0.3), Arizona (1.7), California (13.1), Colorado (1.7), Hawaii (0.4), Idaho (0.4), Illinois (4.5), Kansas (0.9), Maine (0.4), Minnesota (1.9), Montana (0.2), North Dakota (0.2), Nebraska (0.6), New Hampshire (0.4), Oregon (1.2), and Utah (0.7), and Vermont (0.2). Ohio, Texas, and Vermont, with 3.6 percent, 8.0 percent, and 0.2 percent of national GDP respectively, issued combined reporting laws in the last two years. Data is from the U.S. Bureau of Economic Analysis measures of 2005 gross domestic product by state calculated as a percentage of the entire state-based gross domestic product, including Washington DC and four states with no corporate income tax. Raw data available at http://www.bea.gov/bea/newsrelarchive/2006/gsp1006.htm table 3A.