Regarding your recent editorial on combined reporting for corporate income tax in Maryland, you argue that a switch to combined reporting in favor of a 0.65 percent decrease in the corporate rate would represent only a temporary "inconvenience" (How to make Md.'s taxes more competitive," May 9).

The Council On State Taxation, a trade association representing almost 600 corporations engaged in interstate commerce, including significant operations in Maryland, has found that combined reporting neither provides the panacea for perceived "hiding" of profits nor provides the "permanent" revenue benefit asserted in the editorial.


The editorial notes that combined reporting is "a decades-old idea that is the law in a majority of states." While it is true that combined reporting has spread from its mainly western confines to some eastern states, with the exception of West Virginia and Washington, D.C., the mid-Atlantic and South are otherwise devoid of this mandatory filing method.

Had the editorial page ever canvassed corporate tax departments, it would have found that combined reporting is not a short-term inconvenience. The definition of a "unitary business," which determines the entities that are part of the combined report, is notoriously imprecise and subject to controversy, resulting in the under-inclusion of entities; prolonged administrative and court disputes; and arbitrariness by the revenue department in seeking to include profitable entities but excluding loss entities.

The editorial cites the current anti-abuse provisions in the Maryland corporate tax law as an example of complexity. Rather, these provisions underscore that every reporting regime will be subject to scrutiny as to whether it creates opportunities for abuse; it is hardly an argument for why including every related entity under the uncertain unitary business standard, and determining taxable income for the "multi-state conglomerate," to use the words of the editorial, is no more difficult than determining the income of a single entity doing business in Maryland.

One need only look to California and Illinois to see prime examples of states with hopelessly complex combined reporting regimes that are constantly seeking revisions in response to other perceived "loopholes" in the law.

The editorial also asserts that combined reporting "seeks to more accurately calculate a corporation's economic activity in a state." This statement may well reflect the intent, but not the reality.

In practice, combined reporting may actually reduce the link between income tax liabilities and where income is earned. Combined reporting regimes vary across the states; it is fair to say that each state's system is unique. Combined reporting variables include what entities are included or excluded from the combined report; how inter-company transactions are handled; treatment of net operating losses and credits among group members; treatment of foreign income and expenses; and many more complex and arcane tax rules.

Perhaps the greatest variable is apportionment. This imprecise gauge of income attributable to the taxing state becomes even more inaccurate in combined reporting states, as states and taxpayers struggle with the proper inclusion of factors of numerous corporate and pass-through entities. Add on the tendency of taxpayers to exclude profitable entities and revenue departments to exclude loss entities and you get a pretty clear picture of how combined reporting works in the real world.

This leads to the main point of the editorial: revenue. The editorial makes the simplistic "trade-off" argument for a modestly lower corporate rate, saying that there would be some immediate and permanent revenue benefit from a combined reporting move.

In bad times, the Maryland Business Tax Reform Commission found, combined reporting would be a revenue loser. As profits continue to grow (hopefully), the Department of Legislative Services projects revenue gains. Ignore the uncertainties mentioned above that make this revenue spike anything but a certainty, especially in the early years after adoption, when compliance and enforcement will be in their fledgling stages.

Do Marylanders really think a demonstrably fluctuating revenue source will fund long-term tax relief for business? Or, more likely, would Maryland be saddled with a complex, anti-competitive, under-performing corporate tax regime the next time trouble approaches and the state looks to raise revenue?

Independent studies have shown that combined reporting at best is an uncertain proposition for raising revenue – it could just as well be a revenue loser (see, for example, the recent University of Tennessee study on the topic, cited in our opposition testimony to SB 469).

Further, the editorialists should remember that any tax increases will ultimately be borne by labor in the state, through fewer jobs (or lower wages over time), or by in-state consumers (through higher prices for goods and services).

The editorial also seems to embrace the idea that Maryland shouldn't try to compete for investment by larger businesses, instead looking to "start-up" companies for its future. Don't throw in the towel, Maryland! Go for both. Improve your business climate, including your tax regime. Demand performance for business tax breaks by all means. But don't embrace combined reporting as the panacea it isn't.

Douglas L. Lindholm, Washington, D.C.


The writer is president and executive director of the Council on State Taxation.