Combined Reporting: Addressing the Shortfall and Collecting What is Due to DC
All this week, the District’s Dime blog is featuring entries that highlight some of Mayor Gray’s proposals to raise revenue in the FY 2012 proposed budget.
“Combined Reporting.” If you follow DC budget issues at all, you know this topic has seen its share of discussion in the last year. Now, Mayor Gray’s budget would turn the discussion into reality. Gray’s proposed FY 2012 budget includes $160 million in new revenue increases — including implementation of combined reporting — as part of a balanced approach to address a $322 million budget gap. (The cuts are a different story which we wrote about last week.)
Yesterday, the District Dime laid out three ways to assess any proposed revenue increase:
- Would it provide sustainable funding?
- Would it make the DC tax system more progressive?
- Would it strengthen DC’s tax system?
In the case of combined reporting, the answers are “yes,” “yes,” and “yes”
Before explaining why, some background. Combined reporting is intended to prevent multi-state and multi-national corporations from sheltering income and avoiding DC’s corporate income tax. It would raise $23 million in 2012. The DC Council passed combined reporting in 2009, but implementing legislation had not been introduced — until now.
Without combined reporting, many national and multinational companies create subsidiaries to artificially shift profits out of jurisdictions where profits are earned into states where the business tax rate is lower—or where there is no corporate income tax at all. Some major retailers, such as Walmart and Toys R Us, have shifted profits earned into subsidiaries as a tax-avoidance strategy.
Combined reporting addresses this practice by treating the parent company and its fully-owned subsidiaries as one corporation for state income tax purposes.
Here’s how Combined Reporting rates on our three key questions:
Does the revenue proposal provide sustainable funding for DC’s budget? . The District’s business climate is thriving, and large multi-state retailers – like CVS and Walmart – continue to move in to the city’s neighborhoods and business districts. Mayor Gray’s proposal to implement combined reporting meets the sustainability test because it would permanently close tax shelters. It would raise $23 million in 2012 and $19 million per year after that.
Does the proposed revenue increase make DC’s tax system more progressive? Without combined reporting, a locally-owned hardware store could pay more in tax than Home Depot. Combined reporting – which requires that large multi-states pay taxes at the same rate as their small, home-town neighbors – allows the District’s local businesses to stand on more equal ground with their larger, multi-state competitors. This is certainly a progressive move.
Does the revenue proposal help modernize or strengthen DC’s tax system? Revising the tax code to prevent large multi-state corporations from sheltering income for tax purposes is an important way to modernize and strengthen the tax system in the District. Combined reporting is widely recognized as the most comprehensive way to meet this goal.
Stay tuned tomorrow for a look at the proposed increase in income tax withholding . . .