Close corporate tax loopholes through combined reporting

Maryland's General Assembly faces another year of "difficult choices" as it takes up the governor's budget. So it's surprising to me that lawmakers don't turn more readily to what should be an easy choice: closing loopholes in the corporate income tax (CIT).

Federal and state governments have faced declining corporate tax revenue for years, mainly thanks to increasingly aggressive use of legal tax avoidance techniques. At the state level, this generally means shifting income from higher- to lower-taxed jurisdictions. The result is less revenue and a less fair tax structure, where the largest, most profitable corporations are often able to avoid CIT altogether.


How bad is the problem? The New York Times reported that 68 of the largest firms paid no income tax in any state for at least one of the past three years. At the federal level, it was recently reported that the effective CIT rate (that is, what the companies actually pay) has fallen to a 40-year low of 12.1 percent, even as profits reached a 60-year high. While similar state data are unavailable, it's unlikely that the states are doing better than the feds. The result is, while corporate income taxes on the national level contributed 9.7 percent of state revenues in 1980, that dropped to an estimated 5.7 percent by 2010. Over this same period, various surveys show that corporate, after-tax profits have increased something like seven-fold.

Are there solutions? SB269 and HB941 are companion bills in the General Assembly mandating "combined reporting" of income for CIT. Combined reporting effectively treats a parent corporation and its subsidiaries as one corporation for state tax purposes.


This method ties income to the economic activity that generates it by an objective formula. The approach is comprehensive, effective and widely used, yet it is opposed by key Senate Democrats. I argue for combined reporting based on fairness, effectiveness and the need for revenue.

In the current system, profitable corporations avoid taxes using techniques unavailable to smaller companies or individuals. Combined reporting is a proven and effective solution currently used by 23 states — including such "business-friendly" states as Texas — and the District of Columbia. (Other states, including nearby Pennsylvania and Delaware, use a gross receipts tax along with CIT.)

Combined reporting works because it is comprehensive. Maryland has tried to narrowly address specific income-shifting practices, such at the use of Delaware real estate investment trusts or trademark holding companies. But income-shifting techniques are plentiful. Without a comprehensive solution, the tax-avoiders are always two steps ahead.

Are there objections to combined reporting? Those who benefit from the status quo raise many, including:

It's too complicated. But it really is not. It's widely used. The vast majority of Maryland firms doing business in multiple states already deal with it. Procedures for implementation and reporting are well established and harmonized across most states.

It will hurt jobs. There is no evidence of this from the dozens of states using it. Combined reporting is effective precisely because it ties income to real economic activity. You can't put the Columbia Branch of a bank or retailer in Gettysburg. There is also no evidence that the nation's 30-year trend of declining effective tax rates on large corporations has produced any jobs.

Corporations are paying other taxes. True, but so are people. Paying sales or property taxes does not exempt them from the income tax.

Combined reporting amounts to a tax increase. For companies that have been successfully avoiding taxes, this is true. But to reject combined reporting on this basis is to grandfather in every abusive tax avoidance technique in existence.


Maryland's business taxes are already high. Objective studies do not support this. The "reports" commonly cited are from right-leaning, anti-tax groups. In any case, the CIT is not "high" for companies able to avoid it.

The list of objections is long but largely self-serving — and, I believe, unpersuasive to the objective observer. Are any of them more objectionable than the status quo?

On the basis of fairness alone, there is a compelling reason to fix the problem of tax avoidance through income shifting. But given Maryland's current revenue needs, there should be an extra urgency to do something now. Combined reporting is a proven solution, widely recognized as the most effective, practical and fair method of addressing the problem.

The General Assembly will certainly be taking up other bills to raise revenue this session. All of these alternatives will affect far more Marylanders, will be less fair, and generally will be more regressive than implementing combined reporting. Before turning to things like a highly regressive application of the sales tax to gasoline, Maryland needs to adopt combined reporting — now.

Bill Adams is a retired executive living in Howard County who is active in Democratic Party politics. His email is