Tuesday, August 25, 2009

Saqib Ali and Nancy King Discuss Progressive Issues, Part Three

Part Three: Closing Corporate Tax Loopholes Through Combined Reporting.

By Delegate Saqib Ali (D-39).

Our State Government's revenues are in a free-fall. And the budget has been in distress for several years. We need to find ways to reduce spending and increase revenues. This is the dilemma we legislators face now. And this is the dilemma that we faced in the Special Legislative Session of November of 2007. At that time we gathered in Annapolis to find a way to fill the gaping 1.5 billion dollar budget deficit. We are living today with the decisions we made then. And in retrospect some of those decisions don't look so hot.

We were presented with a list of options to raise revenue: slots, sales tax increase, gas tax increase, etc. For me, the lowest hanging fruit was closing Maryland's existing corporate tax loopholes. In particular I'm talking about something known as "Combined Reporting" (CR).

Some background about CR is in order: Multi-state corporations exploit flaws in Maryland’s existing tax code that allow them to minimize their tax burdens by reporting their Maryland earnings in other states. For example Wal-Mart reduced its taxable profits simply by transferring funds to a trust owned by itself. CR closes this loophole by forcing these corporations to pay taxes on the profits they actually made in MD. 21 states have enacted CR laws which prevent large corporations from evading taxes in this deceptive way.

In Fall of 2007, Maryland had the opportunity to do the same. In fact, the tax package proposed by Governor O'Malley and passed by the House of Delegates included this fix. I supported closing this loophole of course. It's a no-brainer. While we were raising the sales tax on all our citizens by 20%, why wouldn't we ask the corporations to at least pay their fair share? Unfortunately the Senate's conference committee stripped CR from the final bill. They did this in the round-about-way that things are done in Annapolis: Instead of implementing CR they opted to study it.

Nancy unfortunately led the charge to kill CR. In fact she introduced Senate Bill 27 to study CR for three years (until after the next election). Even though SB 27 itself didn't pass, its contents were included in the eventual bill that Governor O'Malley signed. At the time, I questioned Nancy's logic for extending the tax loopholes that large corporations exploit. However, I never got a satisfactory explanation.

Even the Washington Post complained bitterly:

The Senate blew another air kiss to the deep-pocketed set by rejecting the governor's proposal to eliminate a major loophole through which corporations dodge Maryland taxes by artificially shifting profits to out-of-state subsidiaries. Thanks partly to this scam, more than half the largest companies doing business in the state pay no corporate income taxes whatsoever. But although 18 other states have closed this loophole, Maryland's Senate balked, referring the issue to a study that would only duplicate the voluminous research that's been done on the topic elsewhere.
Unfortunately, a year after killing CR by study, Nancy then went a step further and watered down that very study by introducing a controversial amendment to delay by 45 days the corporations' deadline to submit information. That was another favor the tax-evading corporations requested. Then just a few days ago she again doubled-down on her effort against CR by saying "It may be that [corporations] could be paying more taxes in combined reporting, but do we want to slap these businesses around with the economy the way it is? Or do we want to help them be more successful so we get more taxes anyway?"

The bottom line is that if we had passed CR in 2007, as I had hoped, we would not be in as big of a budget hole as we are today. And large companies like Wal-Mart wouldn't be walking away with hundreds of millions of dollars that rightfully belong to the people of Maryland. That's a fact.