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Some states are rewriting their tax laws so as to lessen tax avoidance by corporations. Arkansas is not among them.
New York and West Virginia have this year enacted a tax-law revision known as “combined reporting,” according to Citizens for Tax Justice, a nonprofit, nonpartisan Washington research group with a liberal bent. Governors of five other states — Iowa, Massachusetts, Michigan, North Carolina and Pennsylvania — have included combined reporting in their budget proposals for next year. One state, Montana, is requiring corporations to reveal more information about their state tax liability.
State revenue from corporate income taxes has fallen sharply in recent years, as corporate tax lawyers continue to find loopholes in the tax laws. The amount of tax revenue lost because of corporate tax avoidance is not definitely known, nationally or in Arkansas, because some tax records are private and the relevant information is available only to the corporations themselves. But there are ways to estimate, and CTJ estimates that Wal-Mart alone avoided $2.3 billion in state taxes nationwide between 1999 and 2005. (“We don’t know where that number comes from,” a Wal-Mart spokesman, John Simley, said. He said that Wal-Mart didn’t engage in “tax avoidance,” but took lawful deductions.)
“Separate reporting,” the corporate tax system used by Arkansas and many other states, allows multi-state corporations to allocate their income among various subsidiaries, some of which are in no-tax or low-tax states. They then pay state taxes only on the amount that is allocated to each state. Combined reporting requires that all of a company’s nationwide profits be added together for tax purposes. A state then taxes its share of the combined income. The state’s share is calculated by a formula that takes into account the corporate group’s level of activity in the state as compared to its activity in other states.
State tax experts have long advocated combined reporting, and 16 states have used it for years. But only recently have new states begun joining the group.
In Arkansas, the foremost advocate of combined reporting, before he was term-limited out of office, was state Rep. Phillip E. Jackson, a Republican from Berryville. His third and final two-year term ended in December 2006.
“I ran combined-reporting legislation twice, in 2003 and 2005,” Jackson said in a telephone interview. “It never got out of committee. Some corporations don’t like it.” The Arkansas State Chamber of Commerce, one of the most powerful lobby groups in the state, opposed the legislation. Still, Jackson said, “If I had another term I’d be running it again.”
Jackson said it had been estimated that big corporations avoided as much as $100 million a year in Arkansas taxes. “I think combined reporting is part of the solution,” he said. “If we got everybody paying their own share, we could reduce the corporate income tax level, or invest in roads and other infrastructure. That’s what attracts industry. States that have combined reporting have some of the strongest economies in the country, particularly in manufacturing.”
Jackson said he didn’t understand why combined-reporting bills didn’t get more support from small businesses. “The big businesses aren’t paying their share of taxes,” he said. “The small businesses are grossly subsidizing them.” Although small businesses technically have a lobby of their own, they usually don’t vary from the big-business line.
State Revenue Commissioner Tim Leathers said he couldn’t make an estimate of how much tax liability big corporations were avoiding in Arkansas. Some corporations say they’d owe less taxes under combined reporting, and would support combined-reporting legislation, Leathers said.
Wal-Mart doesn’t have a position on combined reporting, Simley said. “Our only position is that we comply with the laws of the state in which we do business.” Anything Wal-Mart can do to reduce costs helps the company keep prices lower for its customers, he said. He also said that Citizens for Tax Justice was substantially supported by labor unions that oppose Wal-Mart.