closing state corporate tax loopholes michael mazerov ([email protected]) center on budget &...
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Closing State Corporate Tax Loopholes
Michael Mazerov ([email protected]) Center on Budget & Policy Priorities
AFL-CIO Workers’ Voice Conference San Francisco, CaliforniaJuly 20, 2003
Why address state corporate tax loopholes (and giveaways)?
Share of Total State Taxes Contributed by Corporate Income Taxes
(States with Corporate Income Taxes)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1979 1989 2000
Why address state corporate tax loopholes (and giveaways)?
Annual Growth in CorporateIncome Taxes, 1995-2000
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Federal State
Ann
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Why address state corporate tax loopholes (and giveaways)?
State Corporate Income Tax Revenues: Actual FY00 and FY00 If Same Share of Total State Taxes As in FY79
$32.5
$54.5
$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
Actual FY00 If same share of total state taxes as in '79
$ b
illio
ns
First, DO NO HARM;Stop New Revenue Losses From:
State corporate income tax coupling to federal deduction for “bonus depreciation” in 2002 and 2003 federal tax cut bills
States can “decouple” their laws; 31 have already
States that Need to “Decouple” from Federal “Bonus Depreciation”
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First, DO NO HARMStop New Revenue Losses From:
New economic development giveaways.
Still proliferating (e.g., “single sales factor” corporate tax formula enacted this year in Wisconsin)
First, DO NO HARMStop New Revenue Losses From: Proposed federal legislation restricting
state corporate tax powers Known as “business activity tax” (BAT)
“nexus” bill Would require a corp. to have a
“substantial physical presence” in a state before that state could tax its profits
Higher nexus threshold than required at present, so states would lose $ rapidly
Opens up all kinds of new tax shelters
First, DO NO HARM; Block Proposed BAT Nexus Bill to Avoid Revenue Losses
NCSL considering resolution to endorse proposed BAT nexus bill
Corporate America demanding this bill as quid pro quo for empowering states to tax Internet sales
NCSL (rightfully) wants this; but too high a price to pay
Need to block any NCSL resolution on BAT nexus at this time
Closing Corporate Tax Loopholes: Delaware Holding Companies
Public Enemy #1 A-k-a Passive Invest. Co. (PIC) or
Intangibles Holding Co. (IHC) Most often set up in DE, NV, MI Most famous DHC is “Geoffrey [Giraffe]”
DE subsidiary of Toys R Us Are essentially shell corporations set up
by banks and accounting firms; “HQs” of 500 DHCs are in a single DE building
How the DHC game works
Step 1: Parent corporation sets up DHC in state without corporate income tax (NV) or that doesn’t tax corps whose only income is from intangible assets (DE, MI)
Step 2: Parent transfers to DHC its patents, trademarks, “know-how,” etc.
Step 3: DHC licenses back to parent the right to use patents, trademarks, etc. in exchange for tax-deductible royalties
Result: payment of royalties reduces (perhaps eliminates) taxable profit of parent, while DHC is not subject to tax on its profit
Documented DE Holding Companies(see: Glenn Simpson, “A Tax Maneuver in Delaware Puts Squeeze on Other States,” Wall Street Journal, 8/9/02, page 1)
Aaron Rents Home Depot Snap on Tools
ADP, Inc. Honeywell Staples
American Greetings JP Stevens Stanley Works
Beatrice Kmart Sunglass Hut
Budget Rent-A-Car Kimberly Clark Syms
Burger King Kohl’s Sherwin-Williams
CompUSA Long John Silver’s Casual Male
ConAgra May Department Stores Limited/V’s Secret
Dress Barn Marsh Supermarkets Tyson Food
Gap Payless Shoesource Toys R Us
Gore[tex] Industries Radio Shack Urban Outfitters
States Still Losing Revenue to the “DE Holding Company” Tax Shelter
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Shutting Down DHC-sStrategy #1: Quick Fix
Amend state law to deny deductions for royalty/interest payments to DHC subsidiaries in tax haven states
Already enacted in AL, CT, MA, MS, NC, NJ, OH
Proposed and still alive in DC, PA Business killed in MD, MO, TX MA and NJ laws best model; business
community has pushed through ineffective/weak versions in AR & NY
Shutting Down DHC-sLong-term Solution
Switch state corporate income tax to “combined reporting” by amending law
Treats parent and subsidiaries as one corp. for tax purposes; therefore, no benefit to shifting income to DHC
Also nullifies other strategies for shifting income to out-of-state subsidiaries
16 states already use Govs, legislators, or activists pushed this
session in IA, MD, MA, NY, WI (no success)
States that Need to Adopt “Combined Reporting”
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Closing Corporate Loopholes:“Nowhere Income” Problem: Corporations can make sales in
states in which they don’t cross taxability threshold — “have nexus”
Solution: enact “throwback” or “throwout” rule
Ensures that corps. are taxed on profits they earn in states where they aren’t taxable — home state taxes profit instead
NJ enacted 2002; MD 2003 (Gov vetoed)
States that Need to Adopt “Throwback Rule”
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Eliminate Unwarranted Corporate Tax Giveaways
Repeal “single sales factor formula” Giveaway to corps. that sell most of
what they produce out of state — especially manufacturers
Big business still actively seeking in AZ, CA, NJ, NY, PA, RI (be on guard)
Repeal being pushed in IL, MA, MO
States that Need to Repeal “Single Sales Factor Formula” (and Similar Giveaway)
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Eliminate Unwarranted Corporate Tax Giveaways
Repeal ability of corporations to “carry back” current losses to years in which they were profitable and obtain refunds of taxes paid in those years
Only minority of states still allow
States that Need to Repeal NOL “Carrybacks”
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Other Current Corporate Tax Reform Efforts Legislation was introduced in TX to
close “Delaware Sub” loophole (use of limited partnerships to avoid franchise tax). Gov. supported; business killed.
NV Gov. Quinn proposed business gross receipts tax — OK, but CIT better. Business killed.
Other Corporate Tax Reform Options: Enact Corporate Minimum Taxes
Enact a second corporate tax not based on profits; corp. pays higher of profits tax or tax on other base
NJ enacted alternative minimum tax last year based on gross receipts
Another good model is NH’s alternative tax based on value added
Other Corporate Tax Reform Options: Stop Tax Avoidance from “Limited Liability Companies”
LLCs are businesses whose profits are taxed on the owners’ tax returns — whether owners are individuals or other businesses
Growing evidence that corps are using LLCs to avoid state profits taxes
Need to pass laws requiring LLC to withhold and pay tax due from out-of-state owners unless owners agree in writing to pay tax due on their pro-rata share of LLC income
Chipping Away at the Internet/ Catalog Sales Tax Loophole
Need federal law to ensure sales taxation of all Internet/catalog sales
But states can require their vendors to collect sales taxes (e.g. Dell Computer). AR, NC, SD do.
States can amend and then enforce laws to compel “dot-com” subsidiaries of retail store chains to charge sales tax (e.g. Barnes & Noble.com)
A recent column headline (and accompanying cartoon):
“It’s Time to Curb Corporate Tax Shenanigans”
From The Nation?Mother Jones?
Closing Corporate Tax Loopholes & Repealing Unwarranted Giveaways Time is ripe; take advantage of
current anger about phony financial reporting and aggressive tax sheltering to push reform
Can raise meaningful amounts of revenue now and help preserve state programs from budget cuts
Lays the groundwork for revitalization of corp. income tax as state revenue source; without it, CIT will steadily decline