Combined Reporting Doesn’t Work for Maryland’s Small Businesses
The new legislative session opened with the promise of serious conversation about corporate taxes and the Maryland Chamber of Commerce has been part of the debate. Much of the discussion, however, has centered on “combined reporting,” a complex formula that assesses taxes based on a company’s profits and losses in other states and in Maryland. On Friday, March 6, HB 663 will be heard in the Ways & Means Committee and the Chamber will provide testimony. Our position on the combined reporting is as follows.
Despite claims to the contrary, combined reporting closes no loopholes and adds little to state coffers overall. Instead, it adds volatility to tax revenues, disadvantages Maryland among its competitors, adds complexity to small businesses, and risks alienating the very industries Maryland is trying to attract.
In the last several years, combined reporting has been exhaustively researched and debated among public policy makers in Annapolis. Specifically, in 2007 the General Assembly directed the Comptroller to study combined reporting’s impact on corporate tax revenue, and he found no net benefit. The Maryland Business Tax Reform Commission also weighed the pros and cons of combining reporting, deciding in the end against it. Here is a summary of those and other studies:
- No Net Impact on Revenue – Combined reporting will not increase revenues. Groups advocating for combined reporting see it as a “silver bullet” that will raise billions in additional tax revenue, but the data do not support that argument. The Comptroller’s study tracked five years of dual tax filings from the same companies, one set using the current system and one using combined reporting. The study found no significant additional revenue. Instead, the two systems brought in roughly the same amount of revenue over the five year period, though distributed differently.
- No Help in Capturing Revenue – Maryland currently has effective laws and successful audit methods for maximizing the capture of tax revenue: 1) the “add-back” provision, legislated in 2004, disallows deductions for certain expenses paid to related corporations in other states, and 2) “section 482”, also from 2004, allows the Comptroller to adjust amounts of income and expense between related corporations. Further, since early in the last decade, the Comptroller’s office has aggressively audited multistate corporations. Using the 2004 changes, the state has added millions of dollars in taxes collected, and the courts have increasingly found in favor of the Comptroller in litigated cases. Because of the legislation, audits, and court decisions, claims that large corporations are evading Maryland taxes by “booking work done in Maryland to states with lower rates” are simply not true.
- Creating a Competitive Disadvantage – Many of Maryland’s major competitor states do not use combined reporting. In assessing our business climate, we should focus our comparisons on those states that pose the greatest threats. In the battle to attract and retain businesses, we most often compete with Virginia, Pennsylvania, Delaware, North Carolina, and New Jersey, and none of these states use combined reporting. Implementing combined reporting would create a competitive disadvantage for Maryland and hamper our ability to create jobs.
- Creating Undue Complexity – Combined reporting is a highly complex method of apportioning taxable income among all the states in which the companies do business, and if adopted, it would apply to all Maryland corporations – small, medium, and large. Although the largest companies may be equipped for such complexity, Maryland’s smaller businesses would not. While the corporate filing fees for small companies would be eliminated, the requirement to file still exists. Adoption of combined reporting would greatly increase the time and expense required to prepare Maryland returns.
Adopting combined reporting would be a step backward and would only serve to slow the momentum toward a more prosperous Maryland.
The Chamber’s position statement on HB 663 is available online. If you have any questions contact Mathew J. Palmer, Senior Vice President, Government Affairs, firstname.lastname@example.org.
Legislative Issues Tag: Taxes