Combined reporting produces thousands of corporate tax “winners and losers”

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By Andy Rosen
Andy@MarylandReporter.com

Combined reporting, a controversial corporate income tax proposal now under study by a state panel, would have had a broad effect on businesses around the state had it been in effect in 2006, creating thousands of corporate “winners and losers,” according to a report issued this month by the state Comptroller’s office.

The effect appears to vary wildly between the state’s different business sectors, with multimillion dollar swings canceling out to a gain of between $109 million and $170 million for the state that year. Combined reporting is a method of calculating a firm’s income tax based on how much they make in the state, rather than where they are headquartered.

Retail companies would have paid $77 million more in 2006 under one method of calculating the effect, while finance and insurance companies would have paid $44 million more. Utilities would have paid $16 million less, management companies’ liability would have dropped by $10 million, and health care and social assistance firms’ payments would have declined by $9 million. The full report to the Maryland Business Tax Reform Commission is available here.

The report says 2,033 companies would pay less Maryland tax and 2,220 companies would pay more, but it would be better for small businesses. Some of the biggest winners would be 980 companies with less than $1 million in “Maryland modified income,” paying $117 million less corporate income tax. The biggest losers are 117 companies with over $1 billion in Maryland income who would pay $193 million more.

Roger Staiger, an adjunct professor of finance at the Johns Hopkins Carey Business School, said the tax change appears to disproportionately harm industries that are struggling right now, such as finance and retail. It benefits more stable businesses like health care and utilities, he said.

“Where you are getting a majority of the increase of tax revenues from the two areas, both of which have been devastated in this current recession,” said Staiger. “It’s people who don’t have to work as hard that are getting the benefit, and the people who have to work three times as hard now have to work six times as hard.”

Though the commission is set to study combined reporting and other business tax issues for the next two years, groups including AFSCME Maryland, the largest state employees’ union, are calling for the state to adopt it soon.

Combined reporting has been a controversial business tax issue for several years. It has been adopted in 23 other states — including Maryland competitor North Carolina — and advocates argue that the existing tax structure unfairly benefits large, multi-state corporations. Opponents say combined reporting is overly complicated and would not provide a significant benefit for the state.

The wide range of effects has provided fodder for discussion of the tax, which is intensifying as the state looks for ways to fill its more than $2 billion budget gap during next year’s General Assembly session. A second report, for fiscal 2007, is expected during the session.

State Sen. Paul Pinsky, D-Prince George’s, who has proposed legislation to institute combined reporting for several years, said the tax change would provide a benefit to the state, even though many businesses did better in 2006 than they are doing right now. Still, he thinks the state would be in a better fiscal position if it had made the change long ago.

“That we haven’t addressed this is just beyond belief,” he said. “We’re just easy pickings for the big corporations.”

Ron Wineholt, vice president of government affairs for the Maryland Chamber of Commerce, said he thinks the variation in business impacts shows that the tax change would not really be closing a loophole.

“I think our main concern is just the huge shift in tax liabilities among varying economic sectors,” he said.

Ray Wacks, the Howard County budget chief who chairs the tax commission, said he’s not sure the commission can draw a firm conclusion based on one year of data. After the commission gets data for the 2007 tax year, he said things may become clearer. That should happen in March, he said.

“If the winners and losers are approximately the same, I think it begins to tell us something about what the impact might be,” Wacks said. “If the winners and losers are very different, I think that also tells us something. It’s hard to draw conclusions on one point in time.”