November 17, 2010

Combined reporting not recommended

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By Megan Poinski
Megan@MarylandReporter.com

Culminating two years of deliberations, debate and discussions, the Business Tax Reform Commission will not endorse combined reporting to the 2011 General Assembly.

Only four members of the 18-member commission voted to support combined reporting. The remaining 13 members at Tuesday’s meeting voted that the commission should recommend against adopting the controversial method of calculating corporate taxes. Combined reporting calculates corporate taxes based on how much companies make in all states that they are located, not where they are headquartered.

House Majority Leader Kumar Barve, who is an accountant and made the motion against combined reporting, said that combined reporting is extremely complicated. It will make figuring out taxes more difficult for businesses, since there is no single accepted formula or method to look at what should be taxed. Some companies would likely pay more, some would likely pay less and some would see no changes – except a new complex way of calculating. As someone who has voted both for tax increases and cuts in his years in the General Assembly, now is not the time to make such drastic changes, Barve said.

“Combined reporting is not the simple moral evil versus light issue that has been portrayed on both sides,” Barve said. “It is extremely complex.”

Barve also said that combined reporting also would create a volatile atmosphere for business taxes, and would make the state’s revenues more difficult to project. A report that was done for the commission earlier this year indicated that if combined reporting had been instituted in 2006, the state would have made $100 million more in corporate taxes. However, according to a partial report presented to the commission Tuesday using 2008 figures, with combined reporting two years ago, the state would have seen between $13 and $51 million less in revenues.

Barve’s rationale, as well as other reasons not to institute combined reporting, will all be memorialized in written recommendations passed along to the governor and General Assembly. The commission has spent the last two years learning about different options for corporate taxes with the goal of making a recommendation for a fair taxation method. The report is due Dec. 15.

Commission member Karen Syrylo, a certified professional accountant, echoed Barve’s concerns about the complexities of combined reporting. And, she cautioned, implementing combined reporting will guarantee that taxes are always more difficult for corporations to file.

Paul Nolan, another commission member, said that since he has seen an analysis of what combined reporting would have done for the budget, he does not support it.

Commission member Michael Ettlinger disagreed with the other members. Combined reporting is the most fair way to tax businesses, and prevents corporations from “gaming the system” by stashing headquarters and employees in other states to avoid paying more taxes. He also said it is good that taxes imposed through combined reporting would be more when the economy is booming and less when it is not; those tax rates are probably what businesses could most afford to pay.

“It shows that it isn’t some crude method for raising taxes,” Ettlinger said.

Montgomery County Democrat Sen. Richard Madaleno agreed with Ettlinger, asking commission members how many retail outlets they shop at that are 100 percent Maryland companies. People throughout the state are shopping at large grocery chains and national department store chairs that may not be paying what Madaleno called “appropriate levels of taxes.” Besides, Madaleno said, other states seem to be moving toward combined reporting.

“We’re going to have to cross that bridge someday,” he said.

The commission’s recommendation will also encourage the General Assembly and administration to bring together a working group of businesses, beneficiaries and other stakeholders to look at incentive programs that were established to encourage businesses to locate in Maryland.

The recommendation came from a desire to maintain existing incentive programs, but make sure that the programs still make sense and that the state is getting adequate economic benefits from the tax breaks.

“We can’t shy away from it,” said Sen. Verna Jones, a Baltimore City Democrat. “We have to be accountable to our state.”

Now that the commission has voted on the recommendations to be contained in the report, the report will be written. David Roose, director of the Bureau of Revenue Estimates, who has been staffing the commission from the Comptroller’s Office, said that he will lead the work drafting the report, which will be completed after Thanksgiving. The commission will have at least one more meeting to look over the draft.

The recommendations are likely to also have an appendix from those who favored policies that were not approved, like combined reporting.