August 12th / 14th, 2011
"Corporate Tax Law: Stupid is as Stupid Does"
My Aunt Peg told me the other day never to refer to someone as stupid.
"The more appropriate thing to say", she advised, "is, 'that the person DID
something stupid' ". But I am conflicted because that wise philosopher Forrest
Gump once said, "Stupid is as stupid does". So what, then, should I say
about the Republicans in Raleigh who recently passed a new law which will
allow North Carolina corporations to pay their taxes in other states where they
have subsidiaries, and where the tax rates are lower? How exactly should I
characterize politicians who complain that the State needs to raise more
revenues, then they vote to let companies pay their Tar Heel taxes in another
state? Are these politicians actually stupid? Or, did they just do
something stupid? Before I answer that question, let's examine the controversy
more closely.
In the past, the NC Secretary of Revenue had the authority to require both
in-state and out-of-state subsidiaries to file a joint tax return if there
was evidence of the multistate corporation shifting income to avoid paying
state taxes. But when the new law takes effect in 2012, the Secretary will
only be able to require joint tax returns if transactions between
subsidiaries have no "reasonable business purposes" other than reducing the
corporation's tax liability. According to NC Justice.org, this allows corporate
accountants to restructure tax shelters to give the appearance of business
purposes.
Earlier this year the NC Department of Revenue warned legislators not to
change the tax law, saying it would result in a one-time loss of $510
million dollars, and annual losses of $97 million dollars. But Republican
representatives pushed the bill through anyway, and our so-called Democratic
Governor signed it into law.
Citizens for Tax Justice say the new law will make North Carolina a "Tax-free
haven for multistate corporations".
To be fair, though, such companies have been playing fast and loose with
taxes long before now. For example, according to NewRules.org, Toys R Us
once shifted $55 million dollars in profits to a Delaware subsidiary to avoid
paying various state taxes. And, then there's Wal Mart, who, according to
Citizens for Tax Justice avoided paying over $4 billion dollars in total
state taxes from 1999 to 2005.
So while tax dodges are nothing new, the law passed last month in Raleigh
legitimizes and encourages these kinds of business practices. Says the NC
AFL-CIO, "the new legislation legalizes corporate tax evasion".
Both parties say the new law needs to be tweaked before it goes into
effect next year, but it needs more than tweaking. NC lawmakers need to rethink
their mistake, and vote to repeal the bill before it can do real damage.
They need to get in lock step with 23 other states who require combined
reporting of corporate income. NewRules.org explains that under that system,
companies would have to total up their combined profits from all subsidiaries
before determining what portion of those profits are taxable in each state.
Absent of such combined reporting, not only will North Carolina lose
hundreds of millions of dollars in revenue over time, but we will be putting our
smaller in-state companies at a distinct disadvantage as they try to
compete with multistate stores who can charge less for their product because
they aren't paying any state taxes.
This new law is a loophole that will put North Carolina in a deep hole. It
was ill-conceived and passed in haste. So perhaps we should say that our
lawmakers just DID something stupid. But they did it at a time when the
State's economy is bleeding red ink. So that makes them
ACTUALLY stupid. Sorry Aunt Peg.
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