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Number of Companies That Paid No Corporate Tax is Meaningless in Maryland, Other States

By: Chris Atkins

A few weeks ago, the Washington Post reported on new figures related to Maryland’s corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system. The story cited a report by the Maryland Comptroller which showed that 68 out of the largest 132 Maryland employers paid no Maryland corporate tax in 2005. Naturally, many lawmakers and activists responded negatively, and they will surely use this data to argue that Maryland should enact combined reporting or some other measure to increase corporate tax revenues.

The fact that 68 out of 132 corporations paid no tax is a meaningless statistic, however, and tells us nothing about corporate tax sheltering. As such, these numbers should not be used by lawmakers to set corporate tax policy in Maryland or any other state.

There are a host of legitimate reasons why those 68 companies paid zero tax, including:

  • Maryland levies a corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. , which is basically a tax on the profits of a company. If a company has no profit, it will pay no tax. What was the profitability of those 68 companies that paid no corporate taxes to Maryland in 2005? The Comptroller’s report doesn’t say.
  • Maryland allows corporate taxpayers to deduct net operating losses (NOLs) from a company’s taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . If an NOL reduces a company’s taxable income to zero, it can carry-forward the NOL for up to 20 years—which means that it is theoretically possible that some Maryland corporate taxpayers paid no corporate income tax in 2005 because they are carrying forward NOLs from as far back as 1985. The Comptroller’s report, however, does not address whether any of the 68 companies paid no income tax because of NOLs.
  • Maryland also allows corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). s to reduce their tax liability through a number of tax credits and preferences. Depending on profitability and the carry-forward of NOLs, these preferences could easily take a company’s tax liability down to zero.
  • These reports create the appearance that companies are paying no state and local tax. As the Council on State Taxation so artfully (link is to 2006 version) points out each year, however, corporate income tax is only a fraction—and not a terribly large one at that—of the total taxes that companies pay to state and local governments each year. Companies also pay sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es, property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es, and a host of other taxes, all of which add up to millions or billions of dollars each year. The Maryland Comptroller’s report does not address these other taxes paid by companies.

No one can seriously doubt that some companies are sheltering income to avoid corporate tax, and combined reporting is one possible tool that states can use to curtail erosion of their corporate tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . But no state, including Maryland, should enact combined reporting because a report says that 68 out of 132 companies aren’t paying any corporate tax, because by themselves those numbers tell us nothing about corporate tax evasion.

To read about the continuing pressure applied to state corporate tax systems by the 21st century economy, read our report called A Twentieth Century Tax in the Twenty-First Century: Understanding State Corporate Tax Systems.