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Corporate Income Tax Reform
Corporations that produce and sell goods in multiple states are required to pay state income taxes based on the portion of their profits that can be attributed to each of the states in which they do business.
Unfortunately, many states have adopted regulations and formulas governing how corporations figure their taxes that enable multi-state companies, including major retail chains, to evade paying their fair-share of state income taxes.
This puts small businesses at a competitive disadvantage. Small businesses with all of their operations in one state cannot take advantage of these tax formulas and loopholes. While their big competitors get away with paying state income taxes on only a portion of their profits, small businesses must pay taxes on all of their earnings.
Fortunately, addressing this problem is relatively straightforward. About half of the states have enacted one or both of the following reforms:
RULES:
Combined Reporting
Many retail chains earn profits at stores nationwide, but have developed an accounting scheme to evade paying their full share of state corporate income taxes. Tax experts believe the practice is costing states billions of dollars in lost revenue. It has also given chains an advantage over locally owned businesses, which must pay state income tax on all of their earnings. Twenty-one states are not vulnerable to these tax-evasion schemes, because they have enacted a policy known as combined reporting.
Throwback Rules
Certain changes in corporate income tax formulas in some states have led to an increase in the amount of corporate "nowhere" income---profits that are not taxable in any state. This puts small businesses at a competitive disadvantage and is one factor behind the overall decline in corporate taxes as a percentage of state revenue. States can solve this problem by adopting a measure known as a "throwback rule."
More:
- State Corporate Income Taxes 2001-2003
This February 2005 study by the Institute for Taxation and Economic Policy an d Citizens for Tax Justice documents 252 national corporation's state and local tax payments. The study reveals that 75 of the 252 paid no state income tax in at least one year from 2001-2003 and from 2001-2003 the 252 companies collectively avoided $41.7 billion, nearly two thirds of state corporate income taxes they potentially owed.
- Corporate Income Taxes in the Bush Years
A September 2004 study by the Institute for Taxation and Economic Policy and Citizens for Tax Justice, reports on the federal corporate income tax avoidance by 275 Fortune 500 companies. The report exposes the effective tax rates of these companies, showing that a large number have payed less tax, zero tax, and even received rebates over the 2001-2003 period.
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