by Mara Lee (Courant)
A plan in the legislature to change the way corporations are taxed would, its supporters say, raise tens of millions of dollars in new state revenue and plug loopholes that allow large companies to reduce their tax liabilities.
Opponents say the change to “combined reporting” would show hostility to business at a time when job creation is crucial.
If the bill becomes law, its proponents say companies would not be able to play one state’s tax rules against another to shift income earned in Connecticut to other states where there would be little or no taxes owed.
States that have combined reporting — 23 in all, including Vermont, Massachusetts, Maine and New Hampshire — combine profits from all subsidiaries and affiliates of a corporation, and then apply a tax based on the amount of business done in the state.
No one can say how much revenue Connecticut loses as a result of companies using corporate tax havens, state-shifting and other accounting moves, but a report by legislative staff estimates that the change would add $88 million in corporate income tax collections.
Connecticut’s corporate income tax revenue fell sharply from $853 million in fiscal 2007 to $566 million in fiscal 2009, ending last June. Much of the decline was due to the recession.
Sanjay Gupta, an accounting professor at Michigan State University, did a national analysis of state corporate income taxes and found that as federal tax shelters were eliminated in 1986’s landmark tax reform, lawyers and accountants turned their focus to shrinking state tax liability. From 1983 to 2002, in-state corporate income tax revenues fell by half when adjusted for inflation.
Some of that is because corporations are using international tax havens and aggressively reducing their federal income tax liability. But some of it is shifting income to states that don’t tax certain kinds of corporate structures.
AT&T has become the poster child for this issue, after it was revealed last year that it was moving tens of millions of Connecticut revenue to a Nevada subsidiary that charges for use of the company logo — thereby reducing Connecticut taxes.
State Rep. Cam Staples, D- New Haven, co-chairman of the legislature’s finance committee, said requiring combined reporting would strengthen existing rules on such creative accounting. But he added, “You just don’t know sometimes what the next creative mechanism will be.”
Opponents of the bill suggest that AT&T had to pay more state tax after an audit, proving the current laws are strong enough. The status of AT&T’s payments isn’t public, and AT&T spokesman Chuck Coursey said the company “addressed all open tax issues with the Department of Revenue Services and they were fully resolved to the department’s satisfaction.”
Other companies save on taxes by creating a real estate arm in a state where those are tax-free, and deducting the rent paid to that division as a business expense. Jeffrey Tebbs, a tax policy analyst for Connecticut Voices for Children, said trying to write specific loophole closers “is like playing whack-a-mole.”
Advocates, led by unions and social service activists, held a rally with about 90 people last week, with repeated chants of “Loopholes suck!”
Joe Brennan of the Connecticut Business and Industry Association said advocates’ reasoning is based on “so-called loopholes that I don’t think exist.”
He said combined reporting “has been rejected by the legislature time after time after time.”
In fact, combined reporting passed the legislature and was signed by Gov. John Rowland in August 2003, but immediately repealed after projections that companies would pay $400 million more if the rules changed.
With two days remaining in the legislative session, no vote is scheduled, and the bill is not part of the state budget.
More than 1,000 companies already file under combined reporting in Connecticut, under a rule that lets each company choose how it pays. In 2008, those companies saved $224 million by choosing that route.
Source: http://www.courant.com/business/hc-hc-combinedreporting-0504.artmay04,0,1320191.story