Anyone who has ever wondered about the extent of corporate tax avoidance in Maryland need wonder no longer: a new analysis from the state’s Bureau of Revenue Estimates (BRE) suggests that it is quite substantial. The analysis, mandated by law two years ago, answers some very important questions: if Maryland had used combined reporting as part of its corporate income tax in 2006, how much more revenue would the state have collected and how would it have affected the taxes paid by certain businesses and industries?
Combined reporting, as this ITEP issue brief explains, is the single most effective means of curbing corporate tax avoidance available to state policymakers. Given the degree of corporate tax avoidance at the state level, its adoption should, overall, be expected to generate significant amounts of additional tax revenue. This is true even if some corporations, due to varying levels of profitability among their subsidiaries, end up paying less in taxes.
Not surprisingly, that is what the BRE’s analysis finds. Had combined reporting been part of Maryland’s tax code in 2006, the state, on net, would have collected as much as $170 million in additional revenue, an amount equivalent to nearly 20 percent of total corporate income tax collections that year.
What’s more, as a related analysis from the Maryland Budget and Tax Policy Institute (MBTPI) points out, it is typically larger businesses that would pay additional taxes under combined reporting. The data released by the BRE indicate that as much as 70 percent of corporations with incomes over $25 million would have owed higher taxes in 2006 had combined reporting been in effect.
To be sure, the BRE’s analysis goes to great lengths to emphasize that, given current economic conditions and other factors, Maryland would not immediately realize $170 million in new revenue if the Assembly and the Governor were to enact combined reporting legislation tomorrow or next week – and you can be certain that opponents of combined reporting will strive to make the same point.
Still, as the MBTPI argues, there’s no time like the present for action. Combined reporting is not some new or risky gambit. The majority of states that have corporate income taxes now use it. (Some have used combined reporting for over sixty years.) Nor will waiting longer to adopt it help address Maryland’s long-term fiscal problems. Fortunately, it appears that some Maryland legislators, such as Senator Paul Pinsky, may be ready to take up the issue once the Assembly reconvenes next year.