Growing Number of States Considering A Key Corporate Tax Reform

Publication Date: April 2007

Publisher: Center on Budget and Policy Priorities (Washington, D.C.)

Author(s): Michael Mazerov

Research Area: Banking and finance; Business

Keywords: Economic projections; State budgets; Corporate finance; Tax code

Type: Report

Abstract:

A growing number of states are giving serious consideration to a major reform in their corporate income taxes long advocated by state tax experts. Most large multistate corporations are composed of a “parent” corporation and a number of “subsidiary” corporations owned by the parent. Combined reporting essentially treats the parent and most subsidiaries as one corporation for state income tax purposes. By requiring corporate parents and subsidiaries to add their profits together, combined reporting states are able to nullify a variety of tax-avoidance strategies large multistate corporations have devised to artificially move profits out of the states in which they are earned and into states in which they will be taxed at lower rates — or not at all. These strategies cost the non-combined reporting states billions of dollars of lost corporate income tax revenue they need to finance essential public services, like education and health care. Households and small businesses, which do not have the opportunities or resources to engage in interstate income-shifting, end up paying higher taxes than necessary to make up for the taxes that large corporations are able to avoid.