Q. Why does
A. We can’t answer this question, but it seems to us that it’s
time for the citizens and especially the business community of Tennessee to
come together to demand that the General Assembly put an end to these tax
breaks.
Q. Why do you say
the food tax is unfair?
A. A
Q. Aren’t Food Stamps and WIC vouchers
exempt from sales tax?
A. Yes, but those are only supplements that do
not provide full nutrition for a family. Also, many low and moderate-income
families do not qualify for those programs.
Q. Isn’t the food
tax the most stable part of TN’s tax system?
A. Stability is not the primary problem with
Business taxes, by comparison, are fairly high-growth taxes over
the long term. Substituting revenue generated by closing corporate tax
loopholes for a portion of the food tax would help make
Q. Isn’t there a budget deficit this year
that would make cutting the food tax difficult?
A. Initially the administration stated its intention to meet the
current budget shortfall by using savings that occur naturally from unfilled
positions, programs that start later than expected or programs that run more
efficiently. However, continuing shortfalls may necessitate budget cuts. While
these are effective short-term solutions, the Food and Business Tax Fairness
Act would help address the long-term budget challenges. It would replace a
portion of the slow-growing food tax with business taxes that are far more
responsive to economic growth. This approach would put our tax system on more
solid fiscal ground as we move forward.
Q. Would cutting the
food tax make a TN personal income tax necessary?
A. TFT believes that the creation of a balanced, common sense
tax system will ultimately require a state income tax, as part of a
comprehensive tax-restructuring package. The issue of a comprehensive tax
package, however, is a much larger debate than whether or not we should cut the
state food tax.
In practice, there is little connection between states that tax
food and states that have an income tax. Of the 9 states without a broad-based
income tax, only 2 tax food (
Q. How would the
Food & Business Tax Fairness Act benefit
A. Small and medium-sized businesses that operate only in
If all multi-state corporations paid their full tax obligations,
we could all pay less tax on our food, and future tax increases could be
delayed or avoided altogether. Also, businesses that compete directly with
large multi-state corporations might be able to compete more effectively when
their competitors have the same tax obligations.
Q. How do you plan
to close the loopholes?
A. There is a mechanism called “combined reporting” that is now
the law in 21 of the 45 states that have a corporate income tax. Those 21
states represent more than 50% of
Michael Mazerov of the Center on
Budget and Policy Priorities (CBPP) and Dr. William F. Fox of the UT Center on
Business and Economic Research have advocated “combined reporting” for years.
Charles McLure, Senior Fellow at the Hoover
Institution and Deputy Assistant Secretary of the Treasury during the Reagan
Administration said, “Failure to require unitary combination is an open
invitation to tax avoidance. (Or — to the extent
transfer prices are misstated — is it
tax evasion?) The advent of electronic
commerce exacerbates the potential problems of economic interdependence and
manipulation of transfer prices.” Charles E. McClure. “The Nuttiness of State and Local Taxes and the Nuttiness of
Responses Thereto”. State Tax
Notes, September 11, 2002, p. 851.
The Supreme Court has twice upheld the fairness and
constitutionality of “combined reporting”.
Q. What is “combined
reporting”? What loopholes will it close?
A. “Combined
reporting” is a comprehensive solution to plug most of the largest loopholes in
state corporate income tax systems. It nullifies the benefit of “PICs”, “nowhere income”, “transfer pricing”, “captive
REITs”, “captive insurance companies” and “stashing” income-earning assets in
tax haven states.
See
Michael Mazerov. State Corporate Tax Shelters and the Need
for Combined Reporting. Center on Budget and
Policy Priorities. October 26, 2007.
For a detailed discussion of some of the major corporate tax shelters
and tax-avoidance strategies to which states that have not adopted “combined
reporting” are vulnerable, consult: http://www.cbpp.org/10-25-07sfp.pdf.
Q. Didn’t
A.
Instead of taking a piecemeal approach to closing corporate tax
loopholes, “combined reporting” goes to the core of the problem with a simple,
common sense solution. By requiring corporations to report all their related
subsidiaries as one business for tax purposes, “combined reporting” nullifies
all the loopholes that hinge on the ability to shift profits back and forth
among subsidiaries.
Q. How does
“combined reporting” work?
A. “Combined reporting” is the alternative to the current
system, “separate entity reporting” for corporate income tax calculation in TN.
Most multi-state businesses are organized as a “parent company” and multiple
subsidiaries with defined functions. “Separate entity reporting” states require
each separate entity (parent or subsidiary) that conducts business in the state
to file its own income tax return. This type of reporting leaves the door open
for businesses to transfer their income from one subsidiary in a state that
would tax it to another subsidiary in a state that would not tax it or tax it
at a lower rate.
“Combined reporting” states require businesses that operate in
their state to file one tax return combining the income and expenses of the
parent company and all its subsidiaries that operate in the same “unitary”
business. The income is then apportioned among the states according to a
formula that includes factors for payroll, real estate and sales.
Q. What is a
“unitary” business?
A. A unitary business is an integrated economic enterprise. One
example is a retail business with transportation, storage, real estate
management and marketing subsidiaries. If that company also owns a subsidiary cattle
ranch, with independent management and sales to outside buyers, the subsidiary
would not be part of the unitary business. If the subsidiary sold its beef in
the retail stores, however, it would be part of the unitary business.
Q. Won’t clever
lawyers and accountants just devise new schemes to avoid state taxes?
A. They may, but “combined reporting” leaves less “wiggle room”
and smaller amounts of income available for tax sheltering. Other
loophole-closing approaches focus on one scheme at a time, and are subject to
more court challenges. Since “combined reporting” has been around so long, has
been upheld by the Supreme Court and is now supported by a model statute and
model regulations promulgated by the Multistate Tax Commission, the lawyers and
accountants will have to earn their fees.
Q. What companies
are most aggressive about sheltering their income from state taxes?
A. Corporations consider their tax returns confidential,
proprietary information. Thus, it is very difficult to get solid information
about their tax reduction strategies. The information that is available comes
from court cases between corporations and state departments of revenue trying
to enforce their laws and collect taxes they believe were due. State
Corporate Tax Shelters and the Need for Combined Reporting article cited
above lists 49 companies known to have used “PICs”.
Another study reviewed 252 corporations and compared the total
state and local income taxes corporations reported in their federal income tax
filings. The study listed state income tax rates for the years 2001 to 2003. It
found that 71 companies paid no state income taxes in at least one of those
years. The aggregate effective tax
rate paid over those three years was 2.6%, while the average rate, according to
state laws, was 6.8%.
Five of those 252 companies were headquartered in
See Robert
S. McIntyre and T.D. Coo Nguyen, State Corporate Income Taxes 2001-2003,
Citizens for Tax Justice. February 2005.
A detailed study of the low aggregate state corporate tax payments made by
many of the largest corporations in the
Q. Is it legal for
these companies to dodge so much of their tax liability?
A. Yes.
Q. How much revenue
would full “combined reporting” generate in
A. Because corporations’ tax returns are treated as
confidential, proprietary information, it is difficult to know with certainty
how much revenue would be generated by “combined reporting” in
The most detailed study on revenue generated through “combined
reporting”, prepared by the Pennsylvania Department of Revenue, received an award for best research by a state revenue
department from the Federation of Tax Administrators. That study found that
“combined reporting” would increase business income tax revenue by 24%. Based
on the following table, TFT estimates additional business income tax revenue in
the range of 12-25%.
Earlier studies produced the following results for other states:
|
Projected Increase in
Corporate Income Tax Revenue Due to Combined Reporting |
Dollar
increase (millions) |
Percent
Increase |
|
|
70 |
13.0 |
|
|
25 |
13.5 |
|
|
5 |
14.2 |
|
|
85 |
19.6 |
|
|
238 |
24.8 |
Source:
March 30, 2004, http://www.massbudget.org/recordoncr.pdf (data
from respective state governments)
Q. Are there other
measures
A. Yes.
Q. How do you
respond to multi-state corporations’ assertions that “combined reporting” would
hinder economic development?
A. “Combined reporting” states are disproportionately among the
most economically successful. From 1979 to 2000, when manufacturing employment
peaked in the U.S., “combined reporting” states constituted: 4 of the top 5
states in manufacturing job growth, 7 of the top 10 states in manufacturing job
growth, 10 of the 17 states with positive manufacturing job growth, and only 6
of the 33 states with zero or negative manufacturing job growth. This does not
prove that “combined reporting” enhances economic development, but it makes a
compelling case that it does not hinder growth.
Q. How do you
respond to multi-state corporations’ assertions that “combined reporting” is
unworkable and has caused lots of litigation over definition of “unitary
business”?
A. There has been considerable litigation over what constitutes
a “unitary” business because such litigation is about the only course available
to businesses to protect their tax avoidance schemes. Now that the Multistate
Tax Commission has prepared a model statute and clear, enforceable definitions
and regulations, such litigation should become less common. In any case, there
has been no more litigation about unitary businesses than about laws
specifically targeting only “PICs”, “REITs” or other
“tax planning strategies”.
Q: Which states are
the common tax haven states?
A:
Q: How would the new
revenue be used?
A: To fund further reductions in
Q. Doesn’t the
Commissioner of Revenue have the authority to require “combined reporting”?
A. Yes, but only on a case-by-case basis and when he has reason
to believe the taxpayer has underreported income. Exercising that authority
would almost surely lead to litigation and the cost-benefit ratio would be too
high to make it worthwhile. Mandatory “combined reporting” would be much more
efficient.
In an article in the prestigious National Tax Journal, Economists William F. Fox, Matthew N. Murray,
and LeAnn Luna wrote: “[W]e argue for “combined reporting” in all states. This
conclusion is based in part on economic considerations that are independent of
any tax planning opportunities, such as the practical problems associated with
measuring economies of scope across related firms. But “combined reporting” can
also lessen tax planning distortions based only on corporate form that waste
resources through avoidance and government oversight activities. William F. Fox, Matthew N. Murray, and LeAnn Luna. “How
Should a Subnational Corporate Income Tax on
Multistate Businesses Be Structured?” National Tax Journal. March 2005.