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COMBINED NONSENSE
February 04, 2008
The lawmakers pushing for "combined reporting" say it closes a loophole for those mean out-of-state corporations. You know, the ones they spend so much time and money bribing to open locations in Iowa. Take Governor Culver:
"It's just not fair that big, out of state, multi-billion dollar corporations that do tens of millions of dollars of business in Iowa avoid paying Iowa income taxes because of an outdated tax loophole."
He doesn't mention that their loophole closer will apply just as much to big multistate corporations headquartered in Iowa. Based on the combined reporting proposal that died last year in the legislature, it would work like this:
Consider two mythical corporations: Desmoinesco, Inc, a wholly owned subsidiary of Siouxfalls Corp. of South Dakota. 1% of Desmoinesco $1,000,000 sales ($10,000) are in Iowa. Its taxable income is $100,000.
Desmoinesco, Inc sells into a nationwide market. Siouxfalls Corp. has no Iowa operations and is not required to file an Iowa return under current law; its $4,000,000 sales are 25% each in Iowa, Nebraska, South Dakota and Minnesota ($1,000,000 each). Its taxable income is $400,000.
Without combined reporting, Desmoinesco's Iowa taxable income is $1,000: 1% of its total taxable income.
If the factors are computed on a combined basis, Desmoinesco will report $5,000 in taxable income. Why? Because Desmoinesco's 1% sales factor is applied to the unitary group's $500,000 combined taxable income.
Now let's turn the companies around, and pretend that Desmoinesco is the parent company, headquartered in Des Moines, and Siouxfalls Corp. is the subsidiary. The numbers work out exactly the same - a $4,000 tax increase for the company headquartered in Iowa (computations here).
So even though the politicians say they are just going after the big bad out-of-state companies (meaning "Wal-Mart"), they are also going after Meredith and every other big company with Iowa headquarters. If they keep it up, these Iowa companies might well someday become "big, out of state" corporations.
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Comments
Great post. This is how we get to the bottom 10% in business climate.
Posted by: The Real Sporer | February 5, 2008 1:11 PM
Welcome, Ted, and thanks for the comment.
Can we convince the GOP to work to get rid of the corporate income tax and its evil spawn, the corruption-inducing targeted tax credits? I'm available to harangue at party gatherings, baptisms and bar mitzvahs...
Posted by: Joe Kristan | February 5, 2008 1:39 PM
Ted's math is a bit off. With more than half the states with a corporate tax having enacted combined reporting, it is hard to see it causing Iowa to reach "the bottom 10% in business climate," whatever that means.
Perusing a map of states which have combined reporting on page 2 of this report, I would bet a few dollars the states which have it are actually doing better than the states without. http://www.cbpp.org/4-5-07sfp.pdf
Reminds me of the stats that "conservative" states actually receive more federal slush and have higher divorce rates than "liberal" states.
Of course, even an oaf knows correlation does not imply causation, but it is interesting nonetheless.
Cheers!
Posted by: Erich Riesenberg | February 8, 2008 1:27 PM