6:00 AM EDT, April 1, 2013
A moment of silence, please, for the death of the combined reporting bill in the General Assembly. The corporate tax reform measure passed away suddenly last week, the result of a 7-6 vote by the Senate Budget and Taxation Committee, which has developed a nasty habit of killing the bill annually. In lieu of flowers, supporters ask that angry letters be sent to lawmakers.
It came as no surprise, of course, but that doesn't make the death of combined reporting any less frustrating. That's because the real effect of the decision is to give large companies greater opportunity to hide their income from Maryland's corporate tax through the customary accounting shell game of subsidiaries, holding companies and other related entities.
What is combined reporting? It simply requires that companies with a presence in multiple states calculate income based on their full holdings and whatever activity they do in Maryland. It reduces the opportunity to shift profits out of state.
When politicians speak of "closing loopholes," this is exactly what they're talking about — or should be. Yet Maryland Democrats, while so often decrying the failure of Congress to close corporate tax loopholes on the federal level, have been extremely reluctant to close the one in their own backyard. And that's despite the fact that they've been willing to raise taxes and cut popular spending programs in recent years while simultaneously giving a pass to infamously tax-averse companies like Wal-Mart Stores, Inc.
To hear business groups talk about combined reporting, one would think it was some left-wing conspiracy to grind Maryland's economy to a halt. But it's the law of the land in a majority of states, including the not-exactly-liberal strongholds of Texas, Arizona, Utah and Montana — where seldom is heard a discouraging word about corporate profits.
We will grant that combined reporting places a greater burden on accountants. It creates winners and losers, as some companies will actually see their taxes decrease. But it's a much more fair way to calculate what large corporations owe — and because it generally produces more revenue, it should reduce pressure to raise taxes on small businesses and other stakeholders.
Still, we would go one step further. Why not approve a combined reporting bill that actually lowers the corporate tax rate? Since combined reporting is expected to eventually generate $60 million or more in new revenue annually for the state, it would certainly be possible to use that money to shrink the corporate tax rate for all.
Opponents point out that neither Virginia and Pennsylvania require combined reporting, and they fret that Maryland might become less competitive with those states. But wouldn't lowering the corporate tax rate help the state's competitiveness even more? And frankly, those companies that would be subject to combined reporting don't likely spend a lot of time sweating about it — they are probably already meeting such obligations in other states.
Liberal groups like Progressive Maryland would probably prefer not to take this revenue-neutral approach. But they are certainly less likely to decry a tax bill that helps mom-and-pop businesses and might even help create jobs. Instead, they can focus on overturning other forms of corporate favoritism like the tax credit given to Maryland-mined coal or the sales tax exemption on pricey gold coins.
We can't blame the legislature for resisting combined reporting when it was offered as a means of raising revenue. Corporate profits tend to swing wildly year to year. During the recent recession, combined reporting might actually have decreased tax revenue — hardly the way to make budgetary ends meet.
But that's also the point. When profits are down, companies shouldn't have to pay as much in taxes. And the state can't afford to be overly dependent on the corporate tax. Economic bubbles are prone to bursting. That's just the natural cycle of things.
The goal here ought not to be to penalize companies or pad the state budget but to make tax collections as fair and appropriate as possible. Combined reporting would have held big companies to the same standard as small ones that lack the resources to ship profits out of state. One can only hope the bill's killers will eventually see how they've done it wrong.
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