States Should Enact Worldwide Combined Reporting to Raise Revenues Without Increasing Taxes

Each year, powerful multinational corporations avoid billions of dollars in state corporate income taxes. They shift their taxable profits into shell companies with little more than a post office box in offshore and domestic tax havens. Most of the avoiders’ complex profit-shifting schemes are perfectly legal under state laws, but they devastate resources that states could use to bolster public investments. It’s entirely within the power of state legislatures to stop corporate tax avoidance. Every dollar dodged by a global corporation is a dollar diverted from public schools, roads, and other shared investments upon which communities depend.

Worldwide Combined Reporting (WWCR) is the gold standard policy that eliminates state corporate income tax avoidance by powerful global corporations. WWCR reflects economic reality, treating the entire corporate group — including all of its operating subsidiaries and fabricated shell companies around the world — as a single, integrated, unitary business enterprise, just as its corporate leadership and financial regulators treat it. WWCR requires complete reporting of all profits, everywhere, then uses standard apportionment formulas (already employed across the country) to calculate the state’s taxable fair share of those profits.

WWCR renders the tax avoiders’ profit shifting pointless and eliminates corporate income tax avoidance at the state level.

Promising WWCR bills are under active consideration in two of the largest states, both with very large economies: California’s bill to close the “Water’s Edge” loophole and New York’s “MEGA Corporations Act,” which would require WWCR for corporations with gross revenues over $1 billion.

States that still rely on outdated tax reporting methods leave themselves needlessly exposed to corporate manipulation. That’s because for most states, calculation of a corporate group’s taxable profits requires two items of information:

• First, the amount of the corporate taxpayer’s “total profits” attributable to its in-state business activity. Recognizing that direct tracing is impossible, all states approximate that portion with an “apportionment formula.” The most common formula, known as “single sales factor,” is the simplest: if, say, the taxpayer group makes 2 percent of its total sales to in-state customers, then 2 percent of its total profits are attributable to the state.
• Second, whether “total profits” is defined as worldwide profits, or just the portion that the corporate group books in the U.S. With a few shell companies in an offshore tax haven or two, a well-advised corporate group can book its profits anywhere in the world. So, the only reasonable policy is WWCR, which prevents corporations from reporting minimal (or no) taxable profits in the U.S.

Corporate groups are also prone to shifting profits to U.S.-domestic tax havens, like Delaware. The 28 states (plus the District of Columbia) that employ the Water’s Edge Combined Reporting method shut down this domestic profit shifting, but leave wide open the loophole for offshore profit shifting.

These U.S. states are voluntarily forgoing much-needed revenues and tilting the competitive playing field against local small businesses that pay their full share. Rigorous, independent analyses project significant revenue gains for states that enact WWCR — often tens of millions of dollars annually for smaller states, hundreds of millions for mid-sized states, and billions for some of the largest. The revenues at stake can fund the health care, education, and infrastructure investments that strengthen communities and drive broadly shared prosperity.

A model statute authored by leading scholars streamlines legislative adoption of WWCR. The U.S. Supreme Court has twice upheld WWCR’s constitutionality. And the policy reflects economic reality. While it is unsurprising that tax avoidance industry lobbyists have opposed WWCR everywhere it has been introduced, their most frequently raised objections are unfounded:

• WWCR is fully administrable by state revenue departments and the sophisticated billion-dollar corporations to which it applies. These giant companies already maintain worldwide financial data and devote enormous resources to complex tax planning; compliance is well within their capacity. States may need a year before the tax change becomes effective to train their auditors, but the expertise is widespread: Alaska has enforced mandatory WWCR for decades and 11 other states already police elective WWCR.
• Relocation would be much more expensive than corporations’ tax expense. Huge corporations’ state tax expenses are inconsequential compared to the expense and disruption of relocation, which is driven instead by access to talent, markets, and infrastructure. And corporations threatening “tax flight” won’t save a single penny of tax by fleeing any of the 34 states that have adopted single sales factor apportionment (described above), where a company’s fair percentage share of taxable profits is simply its percentage share of global sales.
• WWCR is superior to half-measures like denial of deductions for intercompany royalties or for any profit shifting to affiliates located in jurisdictions widely known to function as tax havens. These outdated techniques remain vulnerable to sophisticated tax avoidance planning.
• WWCR is a natural extension of how states already tax multistate businesses. As noted above, most states with corporate income taxes already require Water’s Edge Combined Reporting to shut down domestic profit shifting. WWCR logically applies that principle to offshore profit shifting as well.

WWCR is the preeminent policy for ensuring corporations pay their fair share of state taxes. Instead of merely patching one gap, it renders the entire architecture of corporate profit shifting irrelevant. State lawmakers seeking to reclaim state revenues amid intensifying budget pressures should look to WWCR as a common-sense solution to shut down corporate tax avoidance for good.