Corporate Lobbyist’s Case Against Combined Reporting in New Mexico: A Rebuttal
 See, for example: “Combined Reporting: Questions and Answers,” undated, and “ ‘Combined Reporting’ Unfair,” Albuquerque Journal, October 18, 2009.
 See: Michael Mazerov, “https://www.cbpp.org/sites/default/files/atoms/files/4-5-07sfp.pdf,” Center on Budget and Policy Priorities, April 3, 2009.
 “The principle that a State may not tax value earned outside its borders rests on the fundamental requirements of both the Due Process and Commerce Clauses that there be ‘some definite link, some minimum connection, between a state and the person, property, or transaction it seeks to tax.’ ” U.S. Supreme Court decision in Allied Signal, Inc. vs. New Jersey Division of Taxation (1992), quoting Miller Brothers vs. Maryland (1954).
 Container Corporation of America vs. California Franchise Tax Board (1983); Barclay’s Bank PLC vs. California Franchise Tax Board (1994).
 As economist Charles McLure wrote more than 25 years ago:
[S]ubstantial transactions between affiliated firms can make it administratively difficult, and perhaps impossible, to verify that transfer prices are not being manipulated to shift income between affiliated firms, and therefore between jurisdictions. This problem is most likely to be significant where there are vertical transactions in goods and services with no uncontrolled market price, and it becomes insuperable as vertical integration becomes complete. Second, various kinds of interdependence may make it conceptually impossible to determine the income of the individual firms [in a corporate group]. Particularly important are shared costs and other economies of scale and scope and shared know-how. Though interdependence exists particularly in vertically integrated production and distribution, it can also explain horizontal diversification and demand a finding of unity [in the latter circumstance as well].
Charles E. McLure, Jr., “Defining a Unitary Business: An Economist’s View,” in Economic Perspectives on State Taxation of Multijurisdictional Corporations, Tax Analysts, 1986, p. 68.
Or, as the U.S. Supreme Court famously stated in its 1983 Container decision: “[a]llocating income among various taxing jurisdictions bears some resemblance . . . to slicing a shadow.”
 The same can be said with respect to Minzner’s claim in another recent memo that “Combined reporting would impose tax costs on increasing New Mexico payroll or investment and would provide tax reductions for subjecting New Mexicans to layoffs.” For a refutation of this argument, see: Michael Mazerov, “https://www.cbpp.org/sites/default/files/atoms/files/3-27-10sfp.pdf,” Center on Budget and Policy Priorities, pp. 24-27, p. 38. In any case, this is an argument against the inclusion of property and payroll in the apportionment formula and has nothing to do with combined reporting. Given his background as a former Secretary of Revenue, Minzner presumably knows this, and it is disingenuous of him to make this argument.
 Under the “Delaware Holding Company” (DHC) tax shelter, a corporation transfers ownership of its trademarks and patents to a subsidiary located in a state that does not tax royalties, interest, or similar types of “intangible income.” The subsidiary charges a royalty to the rest of the business for the use of the trademark or patent. The royalty is a deductible expense for the corporation paying it, so it reduces the corporation’s profits in the states in which it is taxable. Moreover, the DHC often loans its “profits” back to the rest of the corporation, which can then reduce its taxable profits further by taking a tax deduction for the interest it pays on the loan. DHCs are set up in Delaware because the state has a special income tax exemption for corporations whose activities are limited to owning and collecting income from intangible assets. They are also often set up in Nevada because that state has no corporate income tax at all.
 Some of the tax-avoidance strategies to which non-combined reporting states are vulnerable are described in Michael Mazerov, “https://www.cbpp.org/sites/default/files/atoms/files/10-25-07sfp.pdf,” Center on Budget and Policy Priorities, October 25, 2007.
 Michael Mazerov, “Most Large North Carolina Manufacturers Are Already Subject to ‘Combined Reporting’ in Other States,” Center on Budget and Policy Priorities, January 15, 2009, p. 6. Manufacturing corporations were chosen for this comparison because, in theory, manufacturing jobs are more likely than are service jobs to be moved in response to state tax policies corporations find objectionable. (Manufacturing activity can often be conducted far from the location of customers, while service businesses more often have to be in close proximity to their customers.)
 See the source cited in the previous note. See also: Michael Mazerov, “https://www.cbpp.org/sites/default/files/atoms/files/4-3-08sfp.pdf,” Center on Budget and Policy Priorities, April 3, 2008; Jack Norman, “Combined Reporting: How Closing Corporate Loopholes Benefits Wisconsin,” Institute for Wisconsin’s Future, February 2009, www.wisconsinsfuture.org/publications_pdfs/tax/iwf_combined_report_feb09.pdf .
 See the source cited in Note 9.
 In his memorandum to state legislators, Minzner identifies one of his clients as Psychiatric Solutions, Inc., a private, for-profit chain of inpatient behavioral health care service facilities. If such a company wants to tap into the New Mexico market for such services effectively it probably has to have facilities in the state since most people would be reluctant to have family members treated in a distant facility. And, indeed, the company quite willingly does business in other combined reporting states; its annual report to the Securities and Exchange Commission for 2008 indicates that it has facilities in such other long-time combined reporting states as Illinois, Colorado, Utah, Arizona, Minnesota, and California. The annual report also indicates that the company’s nationwide total state corporate income tax expense in 2008 was approximately $5 million, representing just 0.3 percent of its total business expenses for the year. (The tax figure was its “provision” for state corporate income taxes, not its actual liability, but it is a reasonable proxy for the latter amount.) Thus, it seems highly unlikely that New Mexico’s adoption of mandatory combined reporting would have a large enough impact on this company’s “bottom line” to affect its willingness to invest in the state.
 For example, in Area Development magazine’s 2008 annual survey of corporate executives concerning the key factors influencing their location decisions, highway accessibility ranked first, and the availability of skilled labor ranked fourth. The state corporate tax rate ranked ninth.
 New Mexico Legislative Finance Committee Fiscal Impact Report for H.B. 51. H.B. 51 was the version of combined reporting legislation introduced in 2008 by (then) Representative Peter Wirth.
 In 2005, 483 corporations elected to calculate their New Mexico corporate income taxes using combined reporting, and an additional 1057 corporations elected to file similar “consolidated returns.” Together, these combined and consolidated returns accounted for 46 percent of all New Mexico corporate tax liability in that year. Source: New Mexico Legislative Finance Committee Fiscal Impact Report for H.B. 51, January 31, 2008.
 New Mexico Blue Ribbon Tax Reform Commission, table of recommendations (recommendation no. 9), available at http://legis.state.nm.us/LCS/bluetaxdocs/BRTRCTableofRecommendations.pdf .
 Minzner appears to be arguing here on behalf of one of his clients, NextEra Energy, which operates a wind farm in the eastern part of the state and may be eligible for renewable energy tax credits. Construction of that facility began in early 2003 before the Blue Ribbon commission issued its recommendation. Nonetheless, that facility likely has already received the credits for at least five of the ten years for which they may be claimed, and the adoption of combined reporting does not reduce the value of the remaining credits. Indeed, by boosting the company’s tax liability, combined reporting may simply enable them to be claimed immediately rather than carried forward. In any case, it seems highly unlikely that New Mexico’s enactment of combined reporting would significantly increase the company’s New Mexico tax liability in dollar terms. (If the credits are substantially or completely eliminating the company’s New Mexico tax liability, then of course even a small increase in tax liability resulting from combined reporting could represent a large increase in liability in percentage terms.) Press reports at the time it was built indicated that the facility was a $200 million investment; that is less than one-half of one percent of the total property of the corporate group of which it is a member — Florida Power and Light (FPL) — according to the latter’s annual report to the Securities and Exchange Commission. It employs only 15 people ( www.nexteraenergyresources.com/content/where/portfolio/pdf/newmexico.pdf ), meaning that its payroll is likely an even smaller share of the corporate group’s than is its property. Finally, it does not appear that FPL has significant electricity sales in New Mexico other than those made by NextEra. In short, it appears that NextEra’s New Mexico “apportionment factors” are likely so miniscule that combined reporting would result in no more than a modest corporate tax liability for the company in the state notwithstanding that the corporate group’s 2008 profit was $1.6 billion. It is worth noting that for the entire corporate group, its provision for nationwide state corporate income tax liability in 2008 was a mere $40 million— an effective rate of one-quarter of one percent.. Finally, it should be noted that NextEra already has facilities in 13 current combined reporting states — California, Colorado, Kansas, Maine, Massachusetts, Minnesota, New Hampshire, New York, North Dakota, Oregon, Texas, West Virginia, and Wisconsin. (See: http://www.nexteraenergyresources.com/content/where/portfolio/pdf/portfolio_by_fuel.pdf .)
 According to the Internal Revenue Service, in 2003, so-called “C” corporations (those subject to federal and state corporate income taxes) with less than $500,000 in gross receipts comprised almost two-thirds of all C corporations. See: www.irs.gov/pub/irs-soi/03ib01ty.xls.
 For the purposes of this discussion, “unincorporated businesses” also include Subchapter S corporations. Although S corporations are regular corporations from a business law standpoint, they are exempt from federal and state corporate income taxes.
 As the Congressional Budget Office observes: “Investments by noncorporate businesses also need to pay investors competitive rates of return. For debt finance, that would be the market interest rate. For equity, the investor-operator of a noncorporate business will want to earn on a marginal investment as much after tax as he or she could earn by buying corporate equity.” Congressional Budget Office, “Taxing Capital Income: Effective Rates and Approaches to Reform,” October 2005, p. 17.
 There are a number of reasons this may well be true notwithstanding the “double taxation” of corporate income that results from corporate profits being subject to the corporate income tax and then again to the personal income tax when paid out as dividends to investors. First, some of those dividends will be received by investors residing in states with no personal income taxes — meaning that the profits will only be taxed once at the corporate level. Second, many dividends will be paid to pension funds or IRAs and not taxed until withdrawn many years later by retirees — meaning that the effective tax rate is sharply reduced. Third, slightly less than half of corporate profits are never paid out as dividends — meaning that the return on the investment takes the form instead of a capital gain that is taxed at a sharply reduced rate by some states or not at all if the stock is transferred at the death of the owner. Finally, a larger share of corporate profits than of non-corporate profits is paid out as tax-exempt interest because corporations can more easily and cheaply obtain debt financing than can smaller unincorporated businesses. (Some of these issues are discussed in the Congressional Budget Office report cited in the previous note.) In sum, the effective rate at which corporate profits are actually taxed is well below the more than 60 percent rate that would apply if the top marginal corporate income and personal income tax rates were summed. Indeed, the CBO estimated that the average effective tax rates on corporate income in 2008 was 26.3 percent and that the effective rate on business income earned by unincorporated businesses was 20.6 percent. (p. 8). (It must be acknowledged that the differential would likely be somewhat larger at the state level due to preferential tax treatment of dividends that exists at the federal level but not the state level.)
 Some of the profits of unincorporated businesses received by individuals may also be sheltered from taxation by New Mexico’s personal exemptions and itemized or standard deductions.
 The state in which the owner of an unincorporated business resides taxes 100 percent of the business’s profit under the personal income tax and provides a credit for income taxes paid on any portion of that income taxable in a different state. In contrast, the profits of a corporation are divided among the states in which it is doing business by a formula, and mismatches between these formulas can lead to “nowhere income” — profits that completely escape state taxation. (For a discussion of how this can occur, see pp. 24-27 of the source cited in Note 6.) The profits of a small unincorporated business are much less likely to “slip through the cracks” and escape taxation completely than are the profits of a corporation, even before taking into account the ability of multistate corporations to exploit the absence of combined reporting.
 Donald Bruce and John Deskins, “State Tax Policy and Entrepreneurial Activity,” November 2006; www.sba.go/advo/research/rs284tot.pdf.