CEO - Tax and Disclosure

Corporate Tax Loopholes: Problem and Solution

In 2010, CEO worked with the Better Choices for CT coalition on S.B. 485, which would make corporations pay their fair share of taxes through the incorporation of mandatory combined reporting.

Background
Connecticut's tax system allows large, multi-state corporations to artificially shift profits to subsidiaries in states without corporate income taxes. This enables larger corporations to avoid their fair share of taxes, costing the state millions of dollars and shifting responsibility for taxes onto local businesses and individuals. Twenty-three states have already adopted mandatory combined reporting to resolve this problem.

Example
For instance, AT&T recently sent $145 million in profits to an affiliate in Nevada, ostensibly for the use of the AT&T logo. AT&T's Connecticut operations were able to deduct this 'licensing fee' as an expense, thereby avoiding paying any tax on the profit! Mandatory combined reporting is a proven tool for closing corporate tax loopholes such as this.

The Fix? Mandatory Combined Reporting
Senate Bill 485 would have effectively closed these loopholes by enacting mandatory combined reporting. This is done by treating parent corporations and their subsidiaries and affiliates as a single corporation for tax purposes. Treating related companies as a part of a single corporation prevents multi-state companies from shifting profits earned in Connecticut to affiliates in another state. By adopting mandatory combined reporting, you bring back millions in due tax revenues and create a level playing field for local businesses in our state.

There are many reasons why corporations should pay taxes:[1]

1. The derive benefits from the public services and transportation system provided by the state.
2. They rely on the state's education system to provide a trained workforce.
3. They depend on the state's court system and police to protect their property and business transactions.
4. Corporations have special privileges - limited liability and unlimited life, that individuals do not have.

Corporate Taxes Decline

Currently 45 states levy some sort of corporate tax, yet across the board corporate taxes as a revenue source are declining.[2] For example, according to CT Voices for Children , in Connecticut, 2002 gross corporation business tax revenues were 4.2% of total state tax revenues compared to 10.6% of total state tax revenues in 1992. In other words, in 1992, nearly 1 in every 10 dollars in taxes raised by the state of Connecticut came from the corporation business tax and by 2002, less than 1 in every 50 dollars of taxes collected came from this source. [3]

Nationally, the federal corporate income tax accounted for 20% of federal taxes or 3.9% of the Gross Domestic Product (GDP) in 1969. By 2003, the same corporate tax accounts for 8% of federal taxes and 1.3% of GDP.[4]

Disclosure

While all agree that tax fairness is important, the ability of states to evaluate state corporate taxes is virtually impossible because neither the Securities and Exchange Commission (SEC) nor most state governments require disclosure of corporate tax payments, credits, breaks or expenditures. While the SEC requires corporations to file annually tax and profit information at a federal level, it is challenging at best to assess tax fairness due to the many ways in which corporations find reporting and disclosure loopholes. Without such disclosure :[5].

1. Legislators and policy makers cannot make informed budget and tax decisions. There is no accountability to the public.
2. State revenues continue to decline while corporations receive hidden entitlements.