Tell It Like It Is: Combined Reporting Improves DC’s Tax System By Making Corporations Disclose Their Profits and Pay Their Fair Share

Mayor Fenty and the DC Council recently approved an important reform to the District’s corporate income tax which will prevent large corporations from avoiding taxes. The law, known as “combined reporting,” is recognized by economists and tax experts as the most comprehensive way for states to stop corporations from abusing tax shelters. A majority of states with corporate income taxes already practice combined reporting; many have had this provision in place for more than 20 years. DC’s Chief Financial Officer has concluded the law, which will go into effect in January 2011, will raise roughly $20 million in revenue annually.

Not surprisingly, combined reporting often faces business opposition. This likely reflects its effectiveness at closing corporate tax loopholes. Since the District’s adoption of combined reporting this summer, the DC law has been attacked by organizations such as the DC Chamber of Commerce and the Council on State Taxation, a trade association of multistate corporations, as well as by individual corporations such as Verizon, Pfizer, and Home Depot.

Combined reporting is important because it promotes tax fairness for the city’s small businesses, which are far less likely than large, nationwide businesses to use tax shelters and other tax avoidance schemes.  The new law should be defended for several reasons:

  • Combined reporting levels the tax-paying field between national and local companies. Without combined reporting, large national and multinationals have a tax advantage by shifting profits earned in DC to states with lower taxes­­’or no taxes at all. While small businesses and local companies that operate only in DC have to pay their fair share of taxes, larger corporations often don’t.
  • Combined reporting will not hurt the District’s business climate. Of the 45 states with a corporate income tax, 23 already have adopted combined reporting. Sixteen have operated with combined reporting for more than 20 years, including California and Illinois. Studies suggest that combined reporting has not affected their economic competitiveness.
  • Combined reporting builds on previous DC efforts to close corporate tax shelters. Elected officials took steps in 2004 and 2009 to close a corporate tax shelter known as the Delaware Holding Company. Using this tax scheme, businesses shift profits to a shell company in the state of Delaware, a state with no corporate income tax. Combined reporting helps close other shelters that are not addressed by previous legislation.
  • A move to eliminate combined reporting would unbalance DC’s budget. Getting rid of combined reporting would create a $20 million budget gap in FY 2012 and beyond.  Recent budget deliberations in the District have focused on the city’s long-term budget problems stemming from the recession, and the need to adopt policies that provide long-term fiscal stability.  Eliminating combined reporting would require cutting local services or raising other local taxes, while keeping taxes low for large national corporations.

To read the full analysis, click here.