By Erich Wagner
Lawmakers say a corporate income tax proposal known as combined reporting would close loopholes large companies use to reduce their Maryland tax liabilities. But business representatives told a House committee Thursday that the state should sit on the issue until a state panel finishes studying the issue next year.
Sponsors of a bill that would institute combined reporting argue that the measure could increase state revenues by a total of $131 million in fiscal 2011, which would be useful given the difficult budget situation. But House and Senate leaders have promised there will be no new taxes this year.
The state’s current tax system views different subsidiaries of corporations as separate entities, which legislators say allows large corporations to dodge state income taxes. As proposed, combined reporting would lump these subsidiaries together, taxing them on the business they do in the state.
Sen. Paul Pinsky, D-Prince George’s, said small and medium-sized businesses that operate only in Maryland cannot take advantage of this, giving out-of-state corporations an unfair advantage.
“If you’re a small or medium-sized business, you don’t do this,” Pinsky said. “Big corporations can undersell their competition, because they’re not paying income taxes.”
But business leaders said the bill does not close a loophole, and is actually a completely different way of monitoring economic activity. They point to the bill’s fiscal note and a report released in October 2009 by the comptroller’s office that says combined reporting creates “winners and losers.”
“It would cause massive tax shifts,” said Ron Wineholt, a representative for the Maryland Chamber of Commerce. “Some will pay more, some less, and some will pay the same.”
The House passed combined reporting during the 2007 special session, but the proposal stalled in the Senate. The chambers came up with a compromise, creating the state Business Tax Reform Commission to study how best to tackle updating the tax structure.
Another bill before the General Assembly would move the reporting date for the commission up to the end of this year, instead of at the end of 2011 as originally planned.
Combined reporting is law in 23 states, including California, Texas, and New York. The District of Columbia recently passed it as well, and the Pennsylvania legislature is considering its adoption as part of Gov. Edward Rendell’s budget this year.
Del. Frank Turner, D-Howard, said the “winners and losers” aspect is merely a function of combined reporting instilling fairness in the tax structure.
“Combined reporting levels the playing field, and makes it a lot more fair,” Turner said. “Twenty-three states are not coming to an end because they passed combined reporting.”
House Majority Leader Kumar Barve was concerned about the bill’s effect on the state’s biotech industry, where major corporations often buy out startup companies when they get a major patent.
“The problem with combined reporting is that the minute a big out-of-state corporation buys a Maryland company, they’re liable [in Maryland],” Barve said.
Wineholt, along with other business leaders, want to let the Business Tax Reform Commission finish its report before lawmakers take any action.
“Don’t cut them off mid-stream,” Wineholt said. “Let them do their work.”