Questing for Atlantis

I noted in my reaction to Del. Saqib Ali‘s recent post at Maryland Politics Watch that I was going to pass on commenting on the issue of combined reporting, mostly because I wanted to focus on the malt beverage question.

Well, Judd Legum has picked up on the issue, and made several misleading if not outright incorrect remarks in connection to it, so I’m going to address combined reporting now.

For those not familiar with it, combined reporting is a legal requirement that a multi-state (or multi-national) corporation must report all of its income to the state, even that which was earned outside of the state’s borders, and then levies taxes based off of how much business the state thinks actually occurred within the state.

It’s a bad idea. To begin with, no corporation pays taxes, only individuals do. Increases in corporate tax rates only serve to reduce employment, increase prices, and lower the overall amount of a society’s wealth. Furthermore, combined reporting is not only a tax, but also a regulatory burden; this further disincentivizes businesses choosing to operate in Maryland and encourages them to leave the state.

But that’s not my real problem. I expect progressives to advocate bad policies. My big problem with Legum’s case is the poor evidence he supplies in support of it.

Here’s the crux of his argument:

Meanwhile, half of the state’s largest for-profits corporations pay zero taxes to Maryland.

This sounds bad on the surface, but the reality is a bit different. As the Tax Foundation points out in response to an earlier WaPo piece in the same vein:

The fact that 68 out of 132 corporations paid no tax is a meaningless statistic, however, and tells us nothing about corporate tax sheltering. As such, these numbers should not be used by lawmakers to set corporate tax policy in Maryland or any other state.

There are a host of legitimate reasons why those 68 companies paid zero tax, including:

• Maryland levies a corporate income tax, which is basically a tax on the profits of a company. If a company has no profit, it will pay no tax. What was the profitability of those 68 companies that paid no corporate taxes to Maryland in 2005? The Comptroller’s report doesn’t say.
• Maryland allows corporate taxpayers to deduct net operating losses (NOLs) from a company’s taxable income. If an NOL reduces a company’s taxable income to zero, it can carry-forward the NOL for up to 20 years—which means that it is theoretically possible that some Maryland corporate taxpayers paid no corporate income tax in 2005 because they are carrying forward NOLs from as far back as 1985. The Comptroller’s report, however, does not address whether any of the 68 companies paid no income tax because of NOLs.
• Maryland also allows corporations to reduce their tax liability through a number of tax credits and preferences. Depending on profitability and the carry-forward of NOLs, these preferences could easily take a company’s tax liability down to zero.
• These reports create the appearance that companies are paying no state and local tax. As the Council on State Taxation so artfully (link is to 2006 version) points out each year, however, corporate income tax is only a fraction—and not a terribly large one at that—of the total taxes that companies pay to state and local governments each year. Companies also pay sales taxes, property taxes, and a host of other taxes, all of which add up to millions or billions of dollars each year. The Maryland Comptroller’s report does not address these other taxes paid by companies.

If Legum wants combined reporting he needs to argue it on its real merits instead of using misleading, specious arguments. And if he’s really concerned with improving conditions in Maryland I’d recommend he read the 2009 Cost of Government Day Report and think about ways to fix our abysmal score rather than worry about finding ways to make our state even more economically toxic.