Today, I am going to present the basic outline for a simplified state computation of corporate income taxes. Among the 50 states (with notable exceptions for Nevada and Wyoming which generally do not tax corporate income) there are currently 50 different methods of computing the amount of income that is subject to tax (taxable base). Indeed, a handful of states require multiple methods to be computed and then choose the one with the highest tax result. Derived over many years of legislative tinkering to appease special interest groups, social engineering initiatives and perhaps to even generate revenue, each state's computation methodology in unique to itself and therefore requires any multistate business to perform countless complex computations to come up with its taxable base for each taxing jurisdiction. Each state then must employ its own collection and audit teams to monitor compliance within its borders. The result is a great amount of effort to derive a unique taxable base for each state. The playing field is therefore ripe for creative attempts to reduce or shelter income from taxation by the use of many strategies which take advantage of the variety of rules among the states.
The solution I propose is a single simple formula to be applied across all jurisdictions. First, since a great deal of effort has already been expended by business to determine their Federal taxable income, let's use that as our starting point. (In reality, most state do use this now but then layer on a variety of addbacks and deductions.) Instead of the numerous adjustments currently employed among the states, only a very few adjustments that have a practicable purpose will be uniformly allowed such as adjusting for tax exempt income to compute a common taxable base used by all states. Next, to compute each state's portion of a multistate business's taxable base, a simple apportionment formula using what is commonly known as the single sales factor (based on destination sales with a throwback rule) would be applied. A more thorough vetting of the rationale of using this approach to apportionment will be addressed in a later blog. This method would divide 100% of each business's tax base among the jurisdictions it has nexus with. No income goes untaxed (except in states blessed with no tax on income) and by applying a unitary group rule for affiliated groups of corporations will also eliminate the gamesmanship that exists in today's environment to shelter income from state taxes.
The only remaining variable will be each state's individual tax rate and any applicable credits it wishes to allow. Here is where each state will now be exposed to an easy comparison amongst its neighbors of who has a business friendly environment and who does not. The transparent contrast of tax rates and tax credits will now allow companies to easily analyze how its operations will be impacted by taxes resulting from the decision to locate in one state versus another. Although many variables determine what the best situs is for a company's operations, the mysterious tax factor will be now be made clear. With a simple, common taxable income base the state needs only to determine how much revenue it needs to meet its own budget requirements and can set its tax rate accordingly. A state which has control of its spending appetite can offer a lower business tax rate which will in turn make itself more attractive and lure new business to locate there and contribute a bit more to the state's coffers. Lather, rinse, repeat.
The beauty of this approach is that a multistate business can compute its tax liability for all locations nationwide on a single form. The taxable base is uniformly computed and apportioned among the applicable jurisdictions of its operations. The army of tax accountants and attorneys hired by businesses are grumbling already, what will they be doing? Meanwhile on the opposing side, the army of state auditors are worried about whether their services are still be needed due to the simplicity of now verifying compliance to a very straight forward method. Since all returns will be centrally processed, the total headcount required can be reduced significantly at great savings to the individual states. The state workers unions may not like this but the states' governors and general population will enjoy the enormous budget savings.
Among the topics I will be discussing in future posts: 1.) Merits of a single sales factor apportionment, 2.) State tax credits and incentives, 3.) Organization and benefits of a centralized processing facility for all states, 4) Expected resistance from various groups to this proposal, 5) Applications of this proposal to individual income taxes, sales tax and other forms of state tax.
No comments:
Post a Comment