Maryland Panel Rejects Combined Reporting

November 17, 2010

Across the country, corporate income tax revenues have fallen, both in the short-term and as part of a long-term trend. While the economy is behind the short-term drop, the long-term fall is more about the rise of LLCs and states’ use of the tax as an economic development tool. They offer a high-rate sticker price with lots of incentive packages, credits, and abatements for targeted industries or businesses. As a consequence, many high-rate corporate income taxes don’t bring in much revenue.

Some Maryland officials think the real villain is corporate tax planning, and to vanquish it requires mandatory combined reporting. This rule would require a combined tax return for a corporation and all of its subsidiaries. If a corporation has a very profitable component in one state and an unprofitable one in another, mandatory combined reporting in both states would require a unified profitable tax return. From one perspective, it’s an accurate picture that prevents transfer pricing abuse. From another perspective, it’s a way for a state with a poor business climate to tax profits being earned elsewhere. For these reasons, businesses and states differ widely on their position on combined reporting.

Unfortunately for those Maryland officials, the latest government study reaffirms previous findings that adopting mandatory combined reporting would actually reduce revenue collections from the corporate income tax. For this reason, the legislative panel making recommendations on the issue is rejecting the notion of adopting mandatory combined reporting, although with some gripes that corporations are somehow getting away with something. From the Baltimore Sun:

“This is not the simple issue that the proponents and opponents make it out to be,” said House Majority Leader Kumar P. Barve, the Montgomery County Democrat who led the effort to delay discussion of the change. “This is the most complex issue that I’ve had to deal with.”

“It appears to make the corporate income tax more volatile,” Barve said. He said he dislikes that the change would affect industries differently, noting that it could give the utility sector a $25 million tax break while increasing taxes on sectors that include manufacturing and retail.

The strongest voice in favor of the change came from Sen. Richard Madaleno, who said the private sector is “fundamentally reorganizing itself” into larger companies that have a greater ability to dodge state taxes.[…]

There is never going to be a “right time” to implement the change, Madaleno said. But “we are going to cross the bridge someday.”

I discussed combined reporting in Pennsylvania testimony earlier this year.

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