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Weekly UpdatesA growing number of states are giving serious consideration to a major reform in their corporate income taxes long advocated by state tax experts. A new report from the Center on Budget and Policy Priorities says "2007 could be a breakthrough year in state corporate tax reform efforts." The governors of six states--Iowa, Massachusetts, Michigan, New York, North Carolina, and Pennsylvania--all recommended this year that their states implement this policy, which is known as "combined reporting" New York enacted combined reporting legislation on April 1 as part of the state's budget bill for FY2007-08.
Most large multistate corporations are composed of a "parent" corporation and a number of "subsidiary" corporations owned by the parent. Combined reporting essentially treats the parent and most subsidiaries as one corporation for state income tax purposes. Their nationwide profits are combined--that is, added together--and the state then taxes a share of that combined income. The 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.
Sixteen states--slightly more than one third of the states with corporate income taxes--have mandated and successfully used combined reporting. (See map.) Until recently, however, that group had not expanded at all--not even after the U.S. Supreme Court ruled in 1983 that combined reporting was a fair and constitutional method of taxing multinational (and, by extension, multistate) corporations.
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That inertia is now being overcome. Four states have enacted combined reporting legislation in the past three years:
* In 2004, Vermont became the first state in more than 20 years to adopt combined reporting, effective in 2006.
* Last year, in adopting a new general business tax to substitute for its corporate income tax, Texas also mandated combined reporting (effective 2008).
* On March 10, the West Virginia legislature adopted combined reporting, effective with the 2009 tax year.
* As part of the state budget bill approved on April 1, the New York legislature accepted Governor Eliot Spitzer's recommendation that the state require combined reporting, retroactive to the beginning of 2007.
* Five other governors--North Carolina, Iowa, Michigan, Massachusetts, and Pennsylvania--have all recommended as part of their current tax and budget packages that their states adopt combined reporting.
For more information, see "Growing Number of States Considering a Key Corporate Tax Reform" on the Center on Budget and Policy Priorities' Web site (http://www.cbpp.org/4-5-07sfp.pdf).
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