Corporate Tax

Maryland's General Assembly faces another year of "difficult choices" as it takes up the governor's budget. So it's surprising to me that lawmakers don't turn more readily to what should be an easy choice: closing loopholes in the corporate income tax (CIT). Federal and state governments have faced declining corporate tax revenue for years, mainly thanks to increasingly aggressive use of legal tax avoidance techniques. At the state level, this generally means shifting income from higher- to lower-taxed jurisdictions.

Americans could scarcely be blamed for viewing any proposal to "simplify" taxes with skepticism. From Steve Forbes' flat tax of 1996 to Herman Cain's recent 9-9-9 proposal, efforts to make taxes simpler have usually meant - at least when held up to closer scrutiny - shifting the budgetary burden from the rich to the working class. But what President Barack Obama revealed today appears to be a far more reasonable attempt to reduce the nation's corporate tax rate from 35 percent to 28 percent (and allowing manufacturers an even lower 25 percent)

Turn on conservative talk radio or television pundits and soon enough you'll hear that the United States has a too-high corporate tax rate that is undermining American business competitiveness and weakening the U.S. economy. This talking point is not spouted just by Republicans and anti-tax conservatives: Democrat-in-chief President Barack Obama made the same claim during his State of the Union address two weeks ago, lamenting how American companies "get hit with one of the highest tax rates in the world.

At an appearance before a business group in Howard County, state Sen. Edward Kasemeyer recently made a comment that he'd like to see Maryland's corporate tax rolled back from the current 8.25 percent by one-quarter of a percentage point per year for several years. Presumably, this is so it might be made more competitive with the 6 percent corporate tax rate of neighboring Virginia and below that of other neighboring states. Mr. Kasemeyer's thoughts on this topic are not just some idle speculation by one Democratic state senator.

You might have seen the news footage of the guy in the orange construction vest who a couple of weeks back angrily yelled at the Occupy Baltimore encampment that he was "working his butt off to support you guys," apparently referring to the unemployed among them. If he really wanted to protest where his tax money may be going, he could have walked a couple of blocks from McKeldin Square. The findings of a new study indicate that because of corporate tax breaks, rebates and loopholes, many Fortune 500 companies pay little or no federal income taxes on their profits.

An influential panel voted Tuesday to delay discussion of altering the state's corporate accounting rules, a move welcomed by the chieftains of large companies who worried that the change could hurt their bottom lines just as the economy appears to be brightening. The change, known as combined reporting, would make it difficult for companies to steer Maryland revenues to shell corporations in other states with more favorable corporate tax rates. Tightening corporate accounting rules has long offered a tempting, even populist, way for lawmakers to chip away at the state's persistent budget shortfalls.

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)

Archbishop Edwin F. O'Brien invoked the recently announced Baltimore Archdiocese school closings in urging state lawmakers Wednesday to approve a corporate income tax credit as a "critically important tool" to help public and private schools. Appearing before the House Ways and Means Committee, O'Brien said difficult decisions have to be made to "avoid losing these schools one by one," and he argued that the business tax credit could be part of the solution. "We pledge to leave no stone unturned" to sustain the church's commitment to education, said O'Brien, one of several witnesses to appear during a hearing that went on for more than three hours.

The news that a complex tax law change known as "combined reporting" could have resulted in $170 million in additional payments from businesses into Maryland's coffers if it had been in effect in 2006 is bound to reignite a familiar debate in Annapolis next year, with progressive groups on one side and the Chamber of Commerce on the other. The two sides have been duking it out over this issue for years, with proponents of combined reporting insisting it ensures that businesses pay their fair share and are unable to hide profits in other states, and opponents saying it would be a logistical nightmare.

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.