Mixing Politics And Taxes

Our View: 'Combined Reporting' For Corporate Income Taxes Might Be A Good Idea, But Pursuing It In An Election Year Would Be Unlikely To Produce Good Legislation

August 13, 2009

It's a long-held axiom that increasing taxes in an election year is bad politics. But the nascent debate over enacting "combined reporting," a corporate tax law system that supporters say ensures companies pay their fair share, suggests that it could make for bad policy, as well.

Combined reporting is not a crazy idea - it's already law in more than 20 states and, in some cases, has been for many years. But it is complicated, and it's not clear that it's always a better way to tax the economic activity of corporations.

The idea is that companies would have to report their earnings from all related corporate entities in all states and designate what portion of that comes from Maryland. It's supposed to be a means to prevent companies from hiding profits in states with lower corporate income taxes, or no corporate taxes at all.

The experience of other states doesn't suggest this system would necessarily be a huge boon. Some companies pay more under the system, but some pay less. Estimates of how much money Maryland would gain under such a system have been hard for the state's fiscal analysts to produce. Projections vary widely, anywhere from $20 million to $150 million a year - a significant amount of money, to be sure, but hardly a fix to Maryland's budget shortfall, which is expected to exceed $1 billion next year.

The chances that Maryland would enact combined reporting in the 2010 legislative session are low. Gov. Martin O'Malley and the leaders of the Senate and House of Delegates say that after raising taxes in 2007, they have no intention of doing so again.

Nonetheless, the idea is getting a big push from the American Federation of State, County and Municipal Employees and other liberal groups who say Maryland should enact combined reporting this year before it considers more cuts to services, layoffs or furloughs to employees, or other cost-cutting measures. Supporters say raising this particular tax in an election year would actually be good politics; it would send a strong populist message, they say, for Maryland to make corporations pay their fair share rather than cut services to its citizens.

The problem is "a strong populist message" and "a sober, detailed debate about the implications of a complicated tax law change" generally do not go together. Combined reporting might be a good idea. But if Maryland adopts it, lawmakers need to do so carefully to make sure they create a system that meets their goals of fairness without unintended consequences. An election year, when legislators are too often interested in looking good for voters, is not the best time for that.

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