March 08, 2005

Corporate Tax Reform in Maryland

Lots of good corporate tax reform bills were discussed in the Maryland legislature's tax writing committees last week. ITEP's testimony on these bills is here.

SB 403 in the Senate and HB 676 in the House would require combined reporting of taxable income for multi-state corporations. ITEP has a nice policy brief explaining why this is a good idea. Here's a quick summary: Right now in Maryland and in maybe 20 other states, corporations that have subsidiaries in other states can report the taxable income of their subsidiaries on separate tax forms. This gives them an incentive to make it appear as if they're earning lots of income in subsidiaries that are located in low-tax states, and little income in their subsidiaries in high tax states. Combined reporting makes this "income shifting" impossible by requiring companies to report all of their subsidiaries' income on the same form.

The other bills, HB 1135 in the House and SB 748 in the Senate, would create a "minimum tax" to ensure that all corporations would pay some tax no matter how many tax loopholes they could otherwise claim.

The minimum tax is an important reform that many states haven't dealt with. No matter what you think of the corporate income tax, everyone can agree that something's wrong with some profitable corporations pay nothing in tax while their competitors pay at 35 percent. Corporate minimum taxes are designed to ensure that every company pays some baseline amount.

Why is Maryland discussing both combined reporting and the minimum tax? Because they tackle very different problems with the state corporate income tax. Combined reporting makes sure that all of a company's income gets reported in-state, but can't do anything to prevent lawmakers from then reducing taxable income using an array of special deductions or credits. A minimum tax just says that no matter which tax breaks you might otherwise be able to claim, you still have to pay some basic amount of tax.

Maryland lawmakers have very good reasons for being concerned about corporate taxes right now, about which more in a later post.


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