Tax loophole that protects corporate profits should be closed
This column is about tax reform, but don’t let that scare you. If you think corporations do not pay their fair share to support the society from which they reap great profits — and polls say the majority of us do — then you’ll want to hear about something called “combined reporting” and how Maryland is well behind other states in making it part of our tax laws.
First, an acknowledgement: Polls also show that most of us think our personal taxes are too high or that we don’t get much bang for our bucks.
Americans have always felt this way. We work hard at avoiding two things — death and taxes. But my look at history also shows more than 40 years of incessant anti-government rhetoric coming from one of the two major political parties and, with it, significant decline in the public’s trust of government. So, the combination of general tax animus and anti-government sentiment — along with all the other weird stuff currently infecting the body politic — explain why polls continue to reveal this grim public view.
Also, I don’t think we take time to think about the services government agencies provide for the general welfare. If the same services were provided by the vaunted private sector, the vaunted private sector would find ways to extract as much profit as possible, and the general cost would be even higher than what we pay now in taxes.
Which gets me back to corporations and “combined reporting.” Here’s a definition I extracted from a couple of experts:
Combined reporting allows states to tax multinational corporations on their universal (or worldwide) profits, not just the profits of their in-state subsidiaries.
Maryland does not do this. We do not have combined reporting, and when it was suggested that it be required — back during the Great Recession of 2007-2009 — a state commission on business tax reform opposed it, saying combined reporting would add “uncertainty at a time when the economy is struggling to recover.” The commission made it sound like a big bookkeeping headache, too.
That report came out 14 years ago.
At the time, 23 other states required combined reporting, and a study by the Center on Budget and Policy Priorities (CBPP) found that most of the largest corporations with facilities and employees in Maryland were already subject to combined reporting in those other states.
Since then, five more states have gone to combined reporting. But Maryland is still not one of them.
The Maryland Chamber of Commerce remains opposed to it, predictably calling it burdensome on business and saying it would not guarantee increased revenue for the state.
Of course, nothing is guaranteed except, you know, death and taxes. But it’s hard to believe that requiring combined reporting, versus sticking with the way the state computes corporate taxes now, would not help Maryland meet its huge fiscal challenges.
Don Griswold, a former tax-avoidance expert who left the corporate world to work for the CBPP, notes that the Institute on Taxation and Economic Policy some years ago estimated that Maryland could generate hundreds of millions of dollars in revenue with combined reporting. “Worldwide combined reporting would completely eradicate corporate income tax avoidance in the state of Maryland,” Griswold says.
A group called Fair Share Maryland is pushing the General Assembly to join the 28 other states that require combined reporting. It’s part of a package of reforms in the Fair Share for Maryland Act of 2024.
Advocates say the status quo is unfair.
“Our tax system puts small, Maryland-based businesses at a disadvantage compared to their larger competitors by maintaining loopholes that allow profitable multi-state and multinational corporations to avoid state taxes,” Fair Share says. “Maryland could further address corporate tax avoidance by adopting worldwide combined reporting, which limits the use of foreign shell companies to avoid state taxes.”
That reform and other loophole-closing changes in tax law could generate $576 million in revenue, Fair Share says.
Let me ask the question that arises every time we talk about closing loopholes or raising taxes on businesses: Will corporations pull out of Maryland if the state moves to combined reporting?
Griswold, the former tax-avoidance specialist, gives a big nay.
“No corporation will pull out of the state, or decline to move operations into the state, simply because Maryland has worldwide combined reporting,” he says. “They’ll have no tax-based financial incentive to flee. Pulling up stakes and leaving the state is a very expensive and disruptive proposition, [and it] won’t save them a penny of tax … because sales is the foundation for [calculating] the share of a company’s total profits that [Maryland] can tax. The only way for a company to reduce this percentage is to stop making sales to Maryland customers. Not gonna happen.”
Ben Orr, the president of the Maryland Center on Economic Policy, points out something that supports Griswold’s take.
“The highest profile corporate move out of Maryland in recent years was Discovery, which chose to move [its headquarters] to a combined reporting state [New York],” Orr says. “New York City is a major entertainment industry hub. Access to creative talent and proximity to other industry players were the deciding factors, not taxes.”
If Marylanders want a successful educational system and progressive policies that provide a good-to-great quality of life, we have to keep up with the costs of all that. Given what polls indicate, you’d think politicians in Annapolis would work up some bravery to further tax corporate profits, and combined reporting sounds like low-hanging fruit for the pickin’.