October 26th, 2012

I WILL END MY TALK ON TAX POLICY TODAY AS I KNOW IT IS BORING, BUT THE LOSS OF CORPORATE TAX REVENUE IS THE CAUSE OF STRUCTURAL BUDGET SHORTFALLS AT ALL LEVEL OF GOVERNMENT.  IF WE DO NOT TURN THIS AROUND AND RETURN TO CORPORATIONS AS GOOD CITIZENS WE WILL CEDE ALL SOCIAL PROGRAMS AND SERVICES THAT GIVE US A FIRST WORLD LIFE.

LAST YEAR THE MARYLAND ASSEMBLY BROUGHT A BILL FORWARD THAT WOULD ADDRESS ONE OF THESE LOOPHOLES.....COMBINED REPORTING.....BUT IT FAILED TO PASS.  OUR LEGISLATORS THEN PROCEEDED TO TELL US THEY WOULD NOT BE ADDRESSING TAXES AGAIN FOR YEARS.  THEY WERE ABLE TO PASS LOTS OF TAX HIKES ON MIDDLE/LOWER CLASS MARYLANDERS AND A TEENY, TINY TAX ON THE RICH THAT O'MALLEY NEEDED IN ORDER TO SAY HE MADE THE RICH PAY IN HIS NATIONAL CAMPAIGN, BUT CORPORATIONS IN MARYLAND CONTINUE TO HAVE A FREE RIDE IN THE STATE.

VOTE YOUR INCUMBENT OUT OF OFFICE!!!!!

PLEASE READ SO YOU CAN TELL YOUR INCUMBENT WHAT NEEDS TO BE DONE!!!  PLEASE NOTE THAT THE STATES OF DELAWARE AND NEVADA.......THIRD WAY CORPORATE POLITICIANS JOE BIDEN AND HARRY REID ARE THE TOP CORPORATE AND WEALTH TAX HAVENS/OFF-SHORE SHELTER STATES IN THE COUNTRY!

Close Corporate Tax Loopholes

Maryland PIRG

PERVASIVE TAX AVOIDANCE—Across the country, some of the nation’s best-known companies—including GE, Google and Goldman Sachs—have avoided paying the taxes they owe, costing Marylanders $2.1 billion last year.

LOOPHOLES COST MARYLANDERS $2.1 BILLION No company should be able to game the tax system to avoid paying what it legitimately owes. And, yet, establishing shell companies in offshore havens for the purpose of tax avoidance is becoming more the rule than the exception for at least 83 of the nation's top 100 publicly traded companies. GE, Google, Goldman Sachs and dozens of others have created hundreds of phantom entities with nothing more than a clever tax attorney and P.O. box.

Official estimates of how much we lose in tax revenue are between $70 billion and $100 billion per year. That's money that is shouldered by average taxpayers, either through additional taxes today or additional debt to be paid by the next generation.

It’s not illegal, but it’s not right.

The result? The average taxpayer paid $472 more this year to cover the $100 billion that GE and others that use offshore tax havens skipped out on. And small businesses and companies that don’t use these schemes have to struggle to compete with those that do.

Meanwhile, the General Assembly and Congress are considering deep cuts for essential public programs — from education, to health care, to clean air and drinking water. They’re asking us to tighten our belts and make sacrifices while giving the tax haven crew a free ride.

We are pushing for common-sense changes that simply say that if corporations are based here and generate profits here, then they should, like all of us who earn income here, pay the taxes they owe.
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  THIS IS WHAT CORPORATIONS HAVE PAID IN MARYLAND AS A PERCENTAGE OF TOTAL STATE REVENUE FOR DECADES.  IF I HAD 2010 I BET IT WOULD BE LOWER.
 
Share of Total State Taxes Contributed by Corporate Income

  1979                      1989                           2000 


5.5%                         5.3%                          4.2%


THIS STUDY DOES A GOOD JOB EXPLAINING WHAT STATES NEED TO DO TO MAXIMIZE CORPORATE TAX REVENUE.  IT ALSO SHOWS THE DOWNSIDE WHEN THEY DON'T.  THERE ARE THREE EASY POLICY CHANGES THAT WOULD BRING BILLIONS MORE IN REVENUE.


Center For Budget and Policy Priorities  2003

Option 1
Some States Unnecessarily Cede Their Right to Tax Some Nonbusiness Income

Some 13 states (Maryland) levying corporate income taxes do not distinguish in their corporate tax laws between business and nonbusiness income.  These states require all multistate corporations that are subject to income taxation to apportion all of their income through the use of a formula.  This is a beneficial policy with respect to income earned in connection with extraordinary or irregular transactions by multistate corporations that are headquartered out of state.  In effect, the statutes of these 13 states require such corporations to treat as apportionable income all profits earned in connection with extraordinary transactions that the states are not barred from taxing by U.S. Supreme Court decisions — precisely the policy recommended by legal expert Walter Hellerstein.  (See the body of the report.)[34]

Nonetheless, with respect to corporations that are headquartered within their borders, these 13 "full apportionment" states may be unnecessarily ceding their ability to tax some corporate profit that they have the legal authority to tax.  For example, a multistate corporation headquartered in Delaware but with sales and facilities in other states might have a "35 percent Delaware apportionment factor."  This means that Delaware's apportionment calculation results in a finding that 35 percent of this corporation's nationwide income is to be taxed by Delaware.  Assume that this corporation earns a large capital gain from the sale of an asset that truly is non-apportionable income under U.S. Supreme Court standards, and assume further that no state other than Delaware would have the legal authority to tax the gain.[35]  Delaware would only seek to tax 35 percent of the gain because it treats all income as apportionable.  The other 65 percent of the gain would be "nowhere income" — profit untaxed by any state.  This result occurs despite Delaware's legal authority to tax 100 percent of the gain on the transaction.

Beyond resulting in an unnecessary relinquishing of revenues they could be collecting, the fact that 13 states do not seek to tax irregular income items received by corporations headquartered within their borders to the fullest extent permitted by Supreme Court decisions arguably has quite adverse consequences for the other corporate income tax states.  The tantalizing possibility that a substantial portion of a multi-billion-dollar capital gain could end up as "nowhere income" arguably encourages corporations to engage in much more aggressive tax-avoidance efforts than they otherwise might.

Take, for example, the recent case of Hercules, Inc., a Delaware-based chemical manufacturer.  Hercules was subject to a corporate income tax in at least four other states in addition to Delaware — Illinois, Maryland, Minnesota, and Wisconsin.[36]  Hercules wanted to get out of the business of manufacturing a particular chemical.  It first spun-off the division manufacturing the chemical into a separate corporation, Himont, that was jointly owned with another corporation in the same business.  Then, a few years later, Hercules sold its 50 percent share of Himont to its partner, reaping approximately a $1.5 billion gain.  Right up to the time Hercules sold its interest, it was actively involved in the management of Himont and continued to purchase large amounts of the chemical from Himont as an input into other products Hercules continued to manufacture.  These facts lead many commentators to argue that the gain was apportionable income under both U.S. Supreme Court standards and the traditional "business income" definition.[37]  And, indeed, the court in Wisconsin so held.

Despite facts that strongly supported the conclusion that Hercules' gain on the sale of its Himont stock was apportionable business income, Hercules in fact reported the gain as nonbusiness income to Illinois, Maryland, Minnesota, and Wisconsin.[38]  Leaving aside differences in corporate tax rates between Delaware and the other states in which Hercules was taxable, if Delaware's corporate tax law had required Hercules to allocate 100 percent of the Himont gain to Delaware as nonbusiness income, Hercules would have been largely indifferent as to whether it treated the gain as apportionable business income or allocable nonbusiness income; 100 percent of the gain would have been taxed in either event.  However, the fact that its headquarters state of Delaware was a tax haven with respect to nonbusiness income arguably provided a strong incentive for Hercules to take the aggressive position that the Himont gain was nonbusiness income.  If Hercules could block any of the states in which it was taxable from re-categorizing the Himont gain as business income, a portion of the gain would go untaxed by any state.  Hercules' aggressive posture paid off; courts in Illinois, Maryland and Minnesota held that the Himont gain was nonbusiness income that those states had no right to tax.

In sum, the states whose laws treat all corporate income as apportionable have — intentionally or unintentionally — implemented a beggar-thy-neighbor tax policy that may well encourage corporations to report as nonbusiness income certain major income items they would otherwise report as apportionable business income.[39]  (These 13 states include such major corporate headquarters states as Connecticut, Delaware, Georgia, and Massachusetts.)  If these states enacted laws to implement a distinction between apportionable business income and allocable nonbusiness income, together with the expansive definition of business income recommended by Professor Hellerstein, they would realize additional revenue and reduce the amount of untaxed "nowhere income" received by major multistate corporations.

YOU CAN SEE APPORTIONABLE INCOME IS REPRESENTED BY MOST OF MARYLAND'S INDUSTRIES.

What is apportionable income?

Apportionable income is earned from engaging in the following activities:

• Service and other activities,
• Royalties,
• Travel agents and tour operators,
• International steamship agent, international customs house broker, international freight forwarder, vessel and/or cargo charter broker in foreign commerce, and/or international air cargo agent,
• Stevedoring and associated activities,
• Disposing of low-level waste,
• Insurance producers, title insurance agents, or surplus line brokers,
• Public or nonprofit hospitals,
• Real estate brokers,
• Research and development performed by nonprofit corporations or associations,
• Inspecting, testing, labeling, and storing canned salmon owned by another person,
• Representing and performing services for fire or casualty insurance companies as an independent resident managing general agent licensed under the provisions chapter 48.17 RCW,
• Contests of chance,
• Horse races,
• International investment management services,
• Aerospace product development,
• Printing or publishing a newspaper (but only with respect to advertising income),
• Printing materials other than newspapers and publishing periodicals or magazines (but only with respect to advertising income), and
• Cleaning up radioactive waste and other by-products of weapons production and nuclear research and development, but only with respect to activities that would be taxable as an “apportionable activity” if this special tax classification did not exist.

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Many major corporations have implemented a corporate income tax avoidance strategy that is based on transferring ownership of the corporation's trademarks and patents to a subsidiary corporation located in a state that does not tax royalties, interest, or similar types of "intangible income."  The subsidiaries often are referred to as "passive investment companies" — "PICs" — and they are most often established in Delaware and Nevada.  (Delaware has a special income tax exemption for corporations whose activities are limited to owning and collecting income from intangible assets.  Nevada does not have a corporate income tax at all.)  Profits of the operational part of a business that otherwise would be taxable by the state(s) in which the company is located are siphoned out of such states by having the tax-haven subsidiary charge a royalty to the rest of the business for the use of the trademark or patent.  The royalty is a deductible expense for the corporation paying it, and so reduces the amount of profit such a corporation has in the states in which it does business and is taxable.  Moreover, the "profits" of the PIC often are loaned back to the rest of the corporation, and a secondary siphoning of income occurs through the payment of deductible interest on the loan.

Option 2: Closing the Trademark Income-Shifting Loophole

The other 22 corporate income tax states — Arkansas, Delaware, Florida, Georgia, Indiana, Iowa, Kentucky, Louisiana, Maryland, Missouri, New Mexico, New York, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, West Virginia, and Wisconsin — and the District of Columbia could realize additional corporate income tax revenue if they adopted combined reporting or enacted laws modeled on those of Alabama, Connecticut, Massachusetts, Mississippi, New Jersey, North Carolina, and Ohio to shut down this widespread, abusive, and costly tax-avoidance technique.


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ALL OF THIS IS A GREAT BIG DEAL BECAUSE WE HEAR TIME AND AGAIN THAT THESE CORPORATIONS NEED EVEN MORE TAX REDUCTION TO STAY COMPETITIVE ABROAD.  THE US CORPORATE TAX IS NOT ONEROUS....IT IS IN THE MID-RANGE FOR ALL DEVELOPED COUNTRIES AND DOES NOT NEED TO GO LOWER.

IF WE DO NOT SHOUT LOUDLY AND STRONGLY TO STOP THIS.....YOUR FEDERAL INCUMBENT WILL LOWER CORPORATE RATES NEXT YEAR.  THAT ALSO EFFECTS WHAT STATES GET.

Why These Three Particular Loopholes May Warrant High-Priority Attention

There are a number of reasons these three particular corporate tax loopholes may warrant higher-priority attention from policymakers than other potential changes in state corporate income tax laws that also could raise additional revenue for states.  (Again, Table 2  (THIS WILL TAKE YOU TO THE REPORT) summarizes the states for which these three possible changes in corporate tax law are relevant.)

• As measured by corporate tax revenue foregone, it seems likely that these provisions are among the most costly loopholes in state corporate tax systems.

• Each of these loopholes can be closed easily, without any alteration of the basic structure of a state's corporate tax.  Indeed, two of the three changes — enacting the throwback rule and amending the definition of apportionable business income — usually involve adding or modifying a single sentence of text in the corporate tax law.

• Making these changes in corporate tax law is likely to begin generating additional revenue fairly quickly.  There is relatively little ambiguity involved in what the changes require of corporations and thus relatively little discretion for corporations to interpret the new provisions in ways that would allow them to mitigate the impact of the changes on their tax liability.  Because the changes are relatively straightforward, corporations are likely to comply on their own rather than being compelled to comply by an audit and, perhaps, litigation.  As a result, states may well begin to receive additional revenue from these changes in the first quarterly estimated tax payments made by corporations after the changes go into effect.[30]

Finally, these changes enable states to pull into their corporate tax bases profits that currently are avoiding taxation completely.  This is inherently true with respect to enacting the throwback rule and eliminating the deduction for royalties and interest paid to related corporations in "tax haven" states.  It is also likely true of the third proposed change — adopting a more expansive definition of apportionable "business income."  (Again, see Appendix B for a discussion of how some states are effectively tax havens for nonbusiness income.)

Revitalizing the corporate income tax is likely to be a long-term project for most states, requiring numerous small reforms as well as fundamental changes in the underlying structure of the tax.  The current fiscal crisis provides an opportunity and an incentive for states to take some important first steps down this path.  The three corporate tax loopholes discussed in this report are among the most egregious provisions of any state tax.  All corporations benefit when states educate their future employees, protect their property, maintain the roads they use to get their products to market, and provide the court systems that adjudicate their contract disputes.  Before state policymakers deprive citizens of vitally-needed services or ask current taxpayers to pay higher taxes to close current budget gaps, they hopefully will make sure that all corporations are paying their fair share of the cost of state services that make an essential contribution to corporate profitability.