Vast Majority of Large Maryland Corporations Are Already Subject to “Combined Reporting” in Other States
Fears of Job Loss from Reducing Corporate Tax Avoidance Are Unwarranted
End Notes
[*] Research conducted by former CBPP intern Quinn Ryan contributed substantially to this report.
[1] See: Michael Mazerov, “State Corporate Tax Shelters and the Need for ‘Combined Reporting’,” Center on Budget and Policy Priorities, October 26, 2007, www.cbpp.org/10-26-07sfp.pdf.
[2] As discussed in the Appendix, some of the locations attributed to companies in this report were based solely on information about job openings posted on corporate websites. In limited circumstances (for example, defense contractor personnel working on military bases), it is possible that the corporation does not own or lease its own building. Nonetheless, the presence of non-sales personnel in the state would subject the corporation to income taxation in that state even in the absence of any company-owned or leased property. In the interest of readability, and because the vast majority of corporate locations identified in this report were confirmed as physical facilities, this report will refer to “facilities” even though in some instances the location might only consist of employees.
A federal law, Public Law 86-272, bars states from imposing their corporate income taxes on corporations whose only presence in a state consists of solicitation of orders for goods by salespeople who work out of their homes or visit from out of state. Accordingly, any job opening whose title even vaguely suggested that the position was sales-related was not used to attribute a taxable presence of the corporation to that state.
[3] Table 1 also indicates that the ninth and tenth best-performing states in manufacturing job growth were also both combined reporting states. Minnesota had the exact same number of manufacturing jobs in 2007 as it had had in 1990; Oregon had a net loss of approximately 100 manufacturing jobs in the same period which in percentage terms rounded down to zero. Table 1 also shows that there were 11 combined reporting states that had better manufacturing job performance than the median state, Alabama, and only 5 combined reporting states that had steeper manufacturing job declines than Alabama.
[4] According to data published by the Internal Revenue Service, corporations deducted $473 billion in federal, state, and local taxes on their 2005 federal tax returns. This amount represented 2.0 percent of total expense deductions of $23.6 trillion. (The data are available at www.irs.gov/pub/irs-soi/05sb1ai.xls.) Since corporations have a strong financial incentive to deduct from their otherwise taxable profit every state and local tax payment for which they are liable, IRS statistics arguably are the most accurate source of information concerning state and local taxes incurred by corporations.
The Council on State Taxation (COST), an organization representing major multistate corporations on state tax matters, has taken issue with using IRS data to evaluate the relative importance of state and local tax costs in influencing corporate location decisions. (See: Joseph R. Crosby, “Just How ‘Big’ Are State and Local Business Taxes?” State Tax Notes, June 20, 2005, pp. 933-935.) Crosby correctly notes that the line-item for taxes deducted on federal returns omits a major category of state and local taxes paid by businesses — sales taxes paid on equipment and supply purchases. (Such taxes are hidden in other expense line-items in the IRS data.) However, as noted above, the line-item also includes a number of federal taxes paid by corporations that are deductible on federal returns — such as the federal telecommunications excise tax and unemployment compensation taxes for some corporate employees. If one were to add a reasonable estimate of the omitted state and local sales taxes and subtract a reasonable estimate of the inappropriately-included federal taxes, the resulting estimate for total state and local taxes incurred by corporations might not differ significantly from the $473 billion IRS figure for total deducted taxes.
In fact, COST has commissioned its own estimate of the total amount of state and local taxes paid by businesses. The figure for state fiscal year 2006 is $553.7 billion. (See: Robert Cline, Tom Neubig, and Andrew Phillips (Ernst & Young LLP), “Total State and Local Business Taxes, 50-State Estimates for Fiscal Year 2006,” February 2007; available at www.statetax.org/WorkArea/DownloadAsset.aspx?id=67460.) This figure represents the estimated taxes paid by all businesses, not just corporations. But even if one assumed that all of these costs were incurred by corporations and substituted this figure for the IRS data for taxes deducted, it still results in an estimate that state and local taxes represent 2.3 percent of total corporate expenses (of $23.6 trillion) — not significantly different from the 2.0 percent figure arrived at using only the IRS data.
More importantly, COST also takes issue with the use of the $23.6 trillion IRS figure for total corporate expenses used in the denominator. COST argues that the relevant analysis is an examination of the share of total final economic output produced by private businesses that is absorbed by state and local taxes paid by such businesses. COST asserts that using the $23.6 trillion of corporate expenses is inappropriate because that figure includes multiple sales of the same item from (for example) a manufacturer to a wholesaler and then from the wholesaler to a retailer. In contrast, using total U.S. gross state product produced in the private sector (otherwise known as private sector “value-added”) measures the value only of final production.
COST’s preferred denominator of gross state product produced by private businesses might be appropriate for evaluating the total “burden” of state and local business taxes on final production in the economy. It is inferior, however, in evaluating the issue under discussion here — the role played by state and local corporate tax costs in influencing corporate location decisions as compared to the role played by other corporate expenses for labor, energy, and transportation. For each actor in the supply chain described above (manufacturer, wholesaler, retailer), the influence of state and local tax expenses on its location decisions is determined in relation to the other expenses incurred in its business that also vary among locations. How many times its inputs may have been resold prior to its purchase of them and how many times its outputs may be resold prior to reaching their final purchasers is irrelevant in influencing its location decisions. What is true for the individual economic actors is true for the supply chain as a whole. Thus, the relative importance of state and local taxes in influencing corporate location decisions in the overall economy is best illustrated by looking at those expenses as a share of total corporate expenses, not the total value of final corporate production or value-added.
In sum, it is entirely reasonable to argue that state and local taxes have a relatively minor impact on corporate location decisions because they constitute only 2.3 percent or less of total corporate expenses and their potential influence is overwhelmed by interstate differences in labor, energy, transportation, and other costs of production, which account for almost 98 percent of total corporate production expenses.
[5] The legislation creating the Maryland Business Tax Reform Commission required corporations to file hypothetical or “pro forma” corporate tax returns based on the assumption that combined reporting had been in effect. The Office of the Comptroller has compiled those returns and compared them to the actual tax liability of the corporations for the same years; it concluded that had combined reporting been in effect in 2006, corporate tax liability would have increased either 17 percent or 23 percent, depending upon which of two approaches to combined reporting (“Finnigan” or “Joyce”) had been implemented. The comparable figures for tax year 2007 were 13 percent and 20 percent, respectively. See: Letter from David Roose to Governor O’Malley, Senate President Miller, and Speaker Bush, March 2, 2010; www.marylandtaxes.com/finances/revenue/reports/combined/ CR_TY2006_RevisedAnalysis-TY2007_InitialAnalysis.pdf . (The percentage changes for tax year 2006 were calculated based on previously-supplied information that tax year 2006 corporate tax collections totaled $868 million; see: www.marylandtaxes.com/finances/revenue/reports/combined/CR_TY2006_InitialAnalysis.pdf.)
[6] George A. Plesko and Robert Tannenwald, “Measuring the Incentive Effects of State Tax Policies Toward Capital Investment,” Federal Reserve Bank of Boston Working Paper 01-4, December 3, 2001.
[7] For a detailed description of some of the tax-avoidance strategies to which non-combined reporting states are most vulnerable, see the source cited in Note 1.
[8] Donald Bruce and John Deskins, “State Tax Policy and Entrepreneurial Activity,” November 2006. Available at www.sba.gov/advo/research/rs284tot.pdf.
[9] For a recent comprehensive survey of this literature, see: Jeffrey Thompson, “Prioritizing Approaches to Economic Development in New England: Skills, Infrastructure, and Tax Incentives,” Political Economy Research Institute, University of Massachusetts at Amherst, August 2010 (http://www.peri.umass.edu/fileadmin/pdf/ published_study/priorities_September7_PERI.pdf).
[10] See: http://www.dllr.state.md.us/lmi/emplists/maryland.shtml. As discussed in Note 2, in a few instances it is possible that the corporation only has employees in a state and does not own or lease a building.
[11] See: http://senatorpinsky.org/site/files/2008_corp_tax_data.pdf.