Corporate profits rose four times faster than state corporate income tax collections between 1990 and 2013 (see graph), suggesting that some corporations may not be paying what they should. State policymakers looking to hold such corporations accountable can look to a policy recently proposed in Europe.
Reacting to mounting evidence of abusive tax avoidance by multinational corporations, the European Commission has proposed requiring large corporations to publicly report their income tax payments to every individual European Union (EU) country to show whether or not they’ve paid their fair share of tax. The 45 U.S. states with corporate income taxes could follow the EU’s lead and require corporations to publicly report their income tax payments to the state, as I argued in a 2007 report.
The disturbing erosion of state corporate income taxes has many possible causes. A growing share of corporate profits is going to firms that aren’t subject to corporate income taxes (their profits are taxed instead under the personal income tax). Also, states have enacted numerous tax breaks in a misguided effort to poach jobs from other states. And multistate corporations have gotten increasingly sophisticated in artificially shifting profits out of the states where they’re earned and into tax-haven states like Nevada and Delaware — just as multinational corporations have learned how to shift profits to tax-haven countries like Bermuda and Ireland.
Corporate tax disclosure that’s public, company-specific, and state-by-state is vital to illuminating the relative importance of these factors and motivating policymakers to close loopholes and rein in tax giveaways.
In the late 1990s and early 2000s, documents made public in court cases showed that companies like Walmart and Toys ‘R’ Us were using complicated tax shelters to reduce their state income taxes. Numerous states responded with measures to shut down these shelters. For example, the number of states adopting a key reform known as “combined reporting” went from 16 to 26 (including Washington, D.C.) in less than a decade.
But we shouldn’t rely on court cases to reveal information needed to assess current corporate tax policy. States should require systematic disclosure of a corporation’s tax payment and enough information about the factors contributing to it (the company’s sales in the state, what tax breaks it claims, etc.) to assess whether corporations are paying what they should. My 2007 report includes a model disclosure bill that could be the basis of state legislation — and has been for bills introduced in Maine, Illinois, and Oregon.
Public tax disclosure would provide the information needed to determine how to reform state corporate taxes so that all companies — large and small — pay their fair share.