Four members of the U.S. House of Representatives — two from each party — reintroduced a bill recently that would create vast opportunities for major multistate corporations to shelter profits from state corporate income taxes, costing states and localities billions of dollars each year. A Who’s Who of corporate America has been lobbying for the Business Activity Tax Simplification Act (BATSA) for several years. With unemployment still stubbornly high, Congress might be tempted to grasp at anything pitched as “pro-jobs,” but in this case, they’d be doing more harm than good.
Here’s the basic issue: in the 44 states with corporate income taxes, state laws outline the types of activities a business might conduct within the state that would obligate the business to pay the tax. Federal laws can invalidate those state laws, however, and BATSA proposes to do just that. As our analysis documents, BATSA would allow multistate businesses to have massive amounts of property or large numbers of employees and representatives in a given state or locality and yet still not be liable for the state’s corporate income taxes — or a local business tax.
States can, do, and should tax corporations that don’t have a permanent or direct physical presence within their borders, and an increasing number of state courts are upholding their right to do so.
When a Massachusetts bank issues a mortgage to a home-buyer in Connecticut, for example, the house that serves as collateral for that loan is protected by local police and fire services, and its value depends crucially on the quality of local public schools. Connecticut courts are also available to the bank should it need to foreclose. Connecticut has every right to tax the bank’s interest earnings on that loan in exchange for those services. But BATSA would deprive Connecticut of that authority if the bank processed the loan at its home office in Massachusetts.
The Congressional Budget Office estimated that a less restrictive version of BATSA would cost state and local governments $3 billion in revenue annually within five years of its enactment. The National Governors Association surveyed the states in 2005 and estimated a $6.6 billion annual loss. Both of these estimates may well understate the revenue loss. In the long run, BATSA’s enactment would prevent states from taxing any corporation that didn’t have a permanent brick-and-mortar facility within their borders. And even for corporations that did have such facilities, BATSA would create numerous opportunities to wall off a large share of their profits in subsidiaries located in other states without income taxes. That means states would lose revenue to pay for schools, health care, infrastructure, and other services and investments essential for a strong economy.
Policymakers and the general public are increasingly concerned about multinational corporations’ ability to shelter profits from federal taxes in foreign tax havens, as the public attention to a recent New York Times story about General Electric shows. It would be unfortunate indeed for Congress to encourage widespread corporate tax avoidance at the state level, especially as states and localities confront such challenges as providing health care to an aging population, bolstering their pension funds, and repairing long-neglected roads and bridges. As it has in past years, Congress should reject BATSA.