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Proposed Change to Combined Reporting Would Cost DC $35 Million And Allow Large Corporations to Continue Avoiding Paying DC Taxes
The Budget Support Act adopted by the DC Council on May 26 includes strong provisions to prevent large corporations from sheltering profits and avoiding paying taxes to the District. BUT a new version of the BSA to be voted on TODAY includes a provision that will cost the District $35 million, according to DC s Chief Financial Officer, and significantly weaken the law. The new version of the BSA would give multi-state corporations a new tax deduction that could reduce their total taxes by $35 million over seven years. Yet the new provision has been structured to appear to have no fiscal impact by pushing the significant costs of this tax relief outside the mandatory four-year financial plan window. Corporations pushing for this change say that combined reporting would lead to adjustments in their financial statements, although the change would not have any real effect on a company s attractiveness to investors. Instead, the impact of this change would be that it would allow large corporations, like Pepco and Verizon, to continue avoiding DC taxes. A similar version of this amendment, when adopted in Massachusetts, reduced the impact of combined reporting by an estimated 25 percent. The DC Chief Financial Officer projects that this provision will save large corporations $35 million over seven years in reduced tax payments to DC. This means that the District would lose out on millions of tax collections as large corporations continue avoiding paying taxes to the District. As well, the new amendment would be fiscally irresponsible: The provision would not be implemented for five years, and this would be done solely to push costs outside DC s four-year financial plan window. In other words, there will be costs starting in Year 5. While the costs in lost tax collections would be substantial, the official four-year fiscal impact would be zero. This is highly deceptive and fiscally irresponsible. Finally, the new provision addresses a non-issue: Combined reporting will lead to a one-time change in corporate financial statements, but this is no reason to give multi-state corporations a new tax deduction that would weaken combined reporting. The change in financial statements does not affect a corporation s underlying strengths or its earnings other than from higher tax payments to the District and will be understood by professional investors as a technical matter rather than a sign of a corporation s financial weakness. Combined reporting will have a de minimus impact on a corporation s attractiveness to investors. It is not surprising that large corporations are opposed to combined reporting, since it is widely seen as the best way to prevent corporations from sheltering profits and avoiding state-level income taxes. It also is not surprising that businesses would seek to limit the impact that combined reporting will have on their tax bills. Yet this is not a legitimate policy reason to weaken the combined reporting bill adopted by the District, which is drawn from model legislation prepared by tax experts at the Multistate Tax Commission. The Council should reject this new amendment.