Basic Outline for Corporate Income Tax

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.

A simple approach towards efficient state taxes

Here's the problem: Why do each of the 50 individual states need to have its own unique set of tax laws administered by its own revenue collection agency?

This only results in a massively inefficient bureaucracy of multiple state agencies all doing the same manner of interpretation, administration, auditing and collecting of taxes from a confused and frustrated taxpaying public. All of this seems rather redundant to me. As a tax professional with over 30 years of experience working with individuals, small businesses and large Fortune 500 corporations, I can see no reason for the level of complexity that exists currently in the state tax arena. In the current economic environment where nearly every state is looking for ways to raise revenue, slash budgets and attract new business within their borders, it all appears extremely wasteful to have each state working so hard to administer an individual set of complex rules and regulations with the sole goal of collecting revenue from taxpayers. The whole structure of state tax collection is needlessly redundant. There is an army of state (not to mention local) employees working with generally inefficient systems, inadequate funding and insufficient support trying to collect the tax dollars so desparately needed to fund government budgets.

In addition to the inherent wastefulness of 50 different state agencies to collect taxes, consider the enormous expense and effort imposed upon taxpayers to make an honest attempt at complying with 50 different sets of rules and regulations, court cases and administrative policies. Which, by the way, are constantly being changed and tweeked by the 50 different state legislatures for either revenue raising or social policy purposes. The army of accountants, lawyers and support persons needed to comply with the current tax strucure is staggering. I know, I am a member of that army. This army is highly educated and generally well paid.

So now there two armies of people working to navigate through the maze of complex, often poorly written tax rules to determine how much is owed and by whom. The insanity of all this must be clear to nearly anyone who has ever earned a dollar. The only benefit from this? It is a great jobs creator. Wasteful? You bet! It drains state budgets merely because of its inefficient nature and forces individuals and businesses to hire expensive staff and consultants to comply.

Here's the solution: Quite simple really.
Create a single unified multi-state tax collection agency which will administer a single set of rules and regulations for the collection of state taxes. And yes, while we're at it, the computation will be made so simple that it can be easily administered by both the tax collector and the taxpayer.

So that is the purpose of this blog. To create a forum to flesh out the details and present solutions to this wasteful environment. I propose to start with the Income Tax first since it the area of my own expertise and the one I think is actually the most complex currently and is most in need of repair. The approach I will be proposing can be applied to both the individual income tax and the corporate business income tax. The ultimate goal will be to champion a new simplified approach to state tax administration that will benefit both the collector and the payer. If successful, I may be putting a lot of talented people out of work. However, isn't better to put those great brains to work doing something more beneficial to society than merely calculating tax liability?