Make corporate tax fairer

Our view: After two years of study, Maryland tax reform commission should endorse combined reporting to level the financial playing field

November 15, 2010

Large corporations have ways of hiding profits that would make a three-card monte dealer proud. After all, the queen of hearts is bound to show up eventually; corporate profits have a way of vanishing permanently.

In Maryland, for instance, retail chains several years ago were caught transferring profits by means of a real estate investment trust, or REIT. A state-based subsidiary paid a hefty rent to a REIT owned by its parent, and the profits could be transferred without ever being subject to the state's corporate income tax.

Lawmakers eventually closed that loophole in 2007, but keeping up with the inventive (and well-paid) minds behind these schemes is challenging at best. Frequently, reversing them requires filing lawsuits that can take years to wend their way through courts.

The best available option to truly level the playing field is an accounting practice known as "combined reporting" that requires multistate companies to add together profits of all subsidiaries for the purposes of assessing what percentage applies to each state.

On Tuesday, the commission formed two years ago by the state legislature to study the potential impact of combined reporting is scheduled to begin deciding what to recommend. Here's a modest suggestion: Maryland needs to adopt combined reporting, not so much to raise revenue but to ensure the state's corporate income tax is applied fairly.

Much of the Maryland business community has reflexively spoken out against combined reporting since it was first proposed more than a half-decade ago. At its heart, they see a tax increase — and yes, some companies are bound to pay more in taxes. They also see an accounting headache and view combined reporting as anti-business.

There are, in fact, some shortcomings to combined reporting. It does require more elaborate accounting to comply. And its immediate impact on state revenue isn't precisely known; some companies will likely end up paying more, some less.

But this much is apparent: Combined reporting is unquestionably a fairer way to apply the corporate tax than what goes on today. Small, local employers would be unaffected. Only large, multistate companies would face an additional regulatory burden.

Nor is Maryland alone in considering the change. Nationwide, 23 states have already adopted combined reporting, and others are likely to follow suit. No doubt the Home Depots and Bed Bath & Beyonds have already filled out the same paperwork for other state tax collectors.

Granted, chances are good that the net effect would be higher tax revenues for Maryland, particularly as the economy recovers. But that doesn't amount to raising taxes anymore than auditing the returns of tax scofflaws is raising taxes. This is more a case of closing loopholes that let some big companies avoid paying their fair share without having to file multiple lawsuits.

Other states that have made the switch have seen an increase in collections, often a big one. The more money Maryland collects from taxing hidden profits reduces the pressure to actually raise taxes on the rest of us, and that's especially useful when the state is facing a potential $1.6 billion deficit in the next fiscal year.

Small business owners ought to be among the first in line to endorse it for this reason. If they have to pay the corporate tax, shouldn't their competitors? If business leaders want to lobby Annapolis, it ought to be to lower the corporate tax rate, not to exempt multistate companies from paying it.

But don't expect the capital's well-heeled business lobbyists to embrace such a plan. It's far easier to decry every enforcement of the tax code as anti-business. But if combined reporting makes a state anti-business, then Maryland would join the ranks of such "liberal" bastions as Alaska, Arizona, New Hampshire, Texas, Utah and Montana. Seems like their reputations for conservative, pro-business principles are holding up just fine.

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