Combined Reporting: DC Council inaction will cause additional $20 million budget shortfall

December 17th, 2010 | by Jenny Reed and Elissa Silverman

Right now, the District is at risk of losing $20 million in tax revenue for Fiscal Year 2012 due to DC Council inaction on an important tax reform. The reform, known as combined reporting, prevents multi-state corporations like CVS and Home Depot from avoiding paying taxes in DC. The Council approved the measure in last year’s budget, and it had been scheduled to go into effect January 2011. But the Council has failed to follow through and take the final steps to put combined reporting in place. If implementing legislation is not passed, the District’s FY 2012 budget gap will grow $20 million larger.

Why is combined reporting important? Companies that operate in multiple states can shift the profits they make in DC onto the books in other states that have lower — or no — business taxes. This practice denies the District needed revenues to help fund schools, libraries, health care and roads. Without combined reporting, these corporations have an unfair advantage over DC’s local, small businesses, and it places the burden on individual taxpayers and small businesses to pick up the slack in lost revenue. Economists and tax experts say combined reporting is the most comprehensive way for states to stop corporations from abusing tax shelters. Twenty-three states of the 45 with a corporate income tax already have enacted combined reporting. 

DC is supposed to be  the 24th, based on the legislation passed in the budget last year. Multi-state corporations such as CVS and Marriott already follow the combined reporting law in these 23 states, and the law has not proven to be a disincentive to do business there. In fact, many of the states with combined reporting have been some of the most economically-successful states in the country.

Not following through with combined reporting implementation in DC would put another $20 million hole on top of the estimated $300-$400 million budget gap for next year. At a time when city employees are being asked to forgo pay and cuts are being made to libraries, parks, and assistance for poor families with children, lack of action on combined reporting might mean deeper cuts next year while national corporations continue to avoid paying DC taxes. 

Combined reporting is a good addition to our tax laws by putting multi-state corporations on par with locally-owned hardware stores and retailers. The DC Council should take the final steps needed to implement combined reporting and pass the necessary legislation as soon as possible.

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