Combined reporting in Connecticut: Fair taxation for shared prosperity

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Declining state revenue projections – contributing to Connecticut’s increasing budget deficit – illustrate why recent legislation to raise revenue by making business taxation more equitable was the right course for the state to take, even as some big corporations step up their attacks.

After a decade of serious discussion, the Connecticut General Assembly wisely conformed our state’s corporate income tax policy to that of 24 other states and D.C. – including every other New England state – by adopting a common sense policy known as mandatory combined reporting.

Despite the legislature’s decision to adopt combined reporting, some corporations that exploit its absence to avoid paying their fair share are making a last-ditch effort to persuade policymakers to reverse the decision.

That would be a mistake. Let’s remember again why we adopted combined reporting:

–Combined reporting nullifies a host of tax-avoidance strategies in one fell swoop, some of which can’t be stopped in any other way. Among the worst of these strategies is offshore profit shifting, using international tax havens to avoid state and federal taxes. This practice has increased dramatically over the past 35 years, with 20 percent of all U.S. corporate profits now booked in offshore havens, a tenfold increase since the 1980s.  In Connecticut alone, Fortune 500 companies hold $185 billion in offshore profits, with 64 percent of those holdings attributable to one company: General Electric (which has the second largest amount of profits held offshore by any U.S. company). Only in California and New York do Fortune 500 companies hold more profits in offshore tax havens.

Offshore holdings graph

 

   —Combined reporting levels the playing field for small businesses that typically operate as a single corporation or otherwise lack the resources to shift profits to out-of-state subsidiaries. The absence of combined reporting creates an artificial advantage for the large multistate corporate competitors. The Small Business Administration has reported that “states with combined reporting rules tend to have more small business activity.”

–Combined reporting raises revenue needed to help preserve critical public services – many of which benefit businesses, like schools that produce skilled workers – and arrests future erosion of the corporate income tax base.

Connecticut companies seeking to maintain their competitive advantage argue that combined reporting will hurt state economy, but evidence is to the contrary:

  • From 2000 to 2014, 10 of the 15 states that had the best record of retaining manufacturing jobs required combined reporting, while just two of the 15 states that lost the greatest share of manufacturing jobs were combined reporting states.
  • A 2010 Voices analysis of 37 for-profit companies with more than 1,000 employees found that 32 (85 percent) of these companies already operated in states with mandatory combined reporting and 27 of these companies operate in five or more combined reporting states.
  • The more than 1,200 Connecticut companies that already elect combined reporting make up just 3 percent of total returns, while representing 46.3 percent of total state corporate tax liability.
  • Along with 24 other states and D.C., including every state in New England, combined reporting exists in so-called business friendly states, such as Texas, Utah, and Arizona.

Combined reporting closes tax-avoidance strategies, is small-business friendly, and raises much-needed revenue for the public good.  If pressure from a small number of large corporations seeking to maintain their unfair advantage over small- to medium-sized businesses succeeds in killing combined reporting, it will be a big step backward for Connecticut.

Every company that wants to benefit from all that Connecticut has to offer, including our highly educated workforce and our enviable quality of life, should contribute their fair share in return.

Derek Thomas is a fiscal policy fellow at Connecticut Voices for Children.

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