Massachusetts becomes 24th state to modernize with combined reporting
With Massachusetts Monday approving legislation to close corporate tax loopholes, a majority of the U.S. economy has now adopted a tax reform that was still considered controversial only a few years ago. “Combined reporting,” as the tax modernization is called, levels the playing field between businesses by preventing companies from using out-of-state subsidiaries to avoid paying their taxes.
Five years ago less than 30% of the U.S. economy, represented by 16 states used combined reporting. Now including Massachusetts, over 55% of the economy will take place in states using combined reporting. Maryland lawmakers considered the proposal but failed to pass it in the 2007 special session.
“This is part of a larger tipping point,” said Johanna Neumann of Maryland PIRG, which advocates for this reform. “Combined reporting has become standard best practice and Maryland is lagging behind. Aside from a few tax lawyers who will lose business on creating complex tax dodges, it's a reform everyone should embrace.”
Combined reporting was first introduced in California in 1937 as a way to adjust to the fact that modern companies often operate across state lines. The practice requires companies to file taxes in a single combined return, rather than carving up activities into separate – often out of state – subsidiaries that can avoid state taxes. Combined reporting eliminates any incentive to use accounting schemes or fictional transactions between subsidiaries as a way to hide reportable income. Combined reporting only taxes companies based on their in-state business activity.
For decades combined reporting was stymied by lawsuits, and then by lobbying from corporations that benefit from tax loopholes. The landscape has shifted as the people become more aware of tax-avoidance schemes that favor out-of-state companies. The sagging economy has also prompted states to look at reforms that generate revenue.
Texas, Ohio, and Michigan don’t levy corporate income taxes but use combined reporting to assess taxes on their broad-based business taxes that the states introduced in 2005, 2006 and 2007 respectively.
