Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

WHEN RATES ARE TOO HIGH, THE ANSWER ISN'T BETTER ENFORCEMENT

February 26, 2008

Some folks are upset that Governor Culver's proposal for combined reporting is moribund in the legislature. David Brunori of Tax Analysts is sympathetic to them ($link):

I've said it a thousand times: If you're going to tax corporate profits at the state level, you must use combined reporting. Anything short of combined reporting allows corporations to legally reduce their corporate tax burdens to zero. Iowa Gov. Chet Culver (D) proposed adopting combined reporting. He was not so much interested in the integrity of the corporate tax structure as in the need to find revenue. He hoped to gain $75 million more each year. In 2006 Iowa collected $284 million from corporate income taxes, about 4.5 percent of its total tax collection.

He adds:

Iowa is one of the states in which Wal-Mart played its real estate rental tax scheme. Wal-Mart transferred its Iowa stores to a Delaware subsidiary and paid the subsidiary rent, which wiped out its Iowa profits. The only way to prevent those shenanigans is to adopt combined reporting.

All of this ignores the elephant in the room: Iowa's highest-in-the-nation corporation tax rate of 12% - a top rate that is 20% higher than in any other state. When a tax rate is way too high, the only salvation is for the tax to not work very well. The estate tax works, or doesn't work, much the same way. Were the combined reporting combined with a serious effort at tax reform - which hasn't been seen in Iowa maybe ever - it would have a chance. At a 12% marginal rate - no way.

Related: Combined Nonsense

Tags: iowa tax policy.