corporate-tax-imageDespite what some would have you believe, the crux of the issue is quite simple -– are the big box stores and national chains being good corporate citizens or not?

The way New Mexico’s corporate income tax code is currently written, they are allowed to be bad corporate citizens –- and many of them take full advantage of the opportunity. Multi-state corporations are allowed to pretend that they don’t make any profits in New Mexico, which allows them to avoid paying any corporate income tax on those profits.

Oddly enough, the same multi-state corporations that do business here charadin New Mexico without paying any corporate income tax -– the Wal-Marts and Kmarts, the Best Buys and big banks –- do business in our neighboring states where they are required pay corporate income tax. They ante up in Arizona, Utah, Colorado and Texas, to name just the nearest neighbors. In fact, New Mexico and Oklahoma are the only states west of the Mississippi that allow this corporate tax charade to be played out. 

There’s been a lot of talk lately about tax cuts, especially in light of the current economic crisis, but there’s far too little talk about why we pay taxes in the first place. Taxes allow us to do things collectively that we would be unable to do as individuals –- build roads and schools, staff police and fire departments, and a whole lot more.

They are our tacit agreement that we’re all in this together, and what’s good for one is good for all.

So if we let profitable multi-state corporations get out of their share of our collective responsibility, it means that the rest of us -– workers, small business owners, retirees –- must pay for the infrastructure that allows these corporations to do business here.

The answer to this problem is a tax reform called “unitary combined reporting.” It’s called combined reporting because it requires multi-state corporations to combine their income from all states where they do business for the purpose of establishing their profits in each one.

The state’s Taxation and Revenue Department has estimated that adopting this reform would recover lost corporate income tax revenues amounting to $70 million at the current level of collections. That would go some distance toward plugging the $450 million hole in state finances that has recently opened up.

New Mexico is leaving money on the table -– money that must be collected from New Mexico businesses and individual tax payers instead.

The most recent attempt at disinformation about combined reporting came from Dick Minzner, a former state legislator and current lobbyist for multi-state corporate clients. In a letter published in the Albuquerque Journal, he implied that this widely used method of filing corporate income taxes is peculiar, unusual and perhaps illegal. Mr. Minzer’s problem with combined reporting, though, is that it will require the multi-state corporations he works for to pay their fair share of state taxes.

The factual distortion in Mr. Minzner’s letter is the statement that “the principal [sic] impact of mandatory combined reporting would be to base the New Mexico corporate income tax in part on the income of corporations and subsidiaries that do not do business in New Mexico.” This statement is false and misleading –- and he’s not the first to use it. Truth is, the due process clause of the U.S. Constitution precludes New Mexico or any other state from taxing out-of-state income. If combined reporting did tax out-of-state income, it would not have been upheld by the U.S. Supreme Court.

Combined reporting is the method used for corporate income tax reporting in 23 states, including almost all the states west of the Mississippi.

In recent years, the states of New York, Texas, Vermont, West Virginia and Massachusetts have adopted this reform. The method has repeatedly been found to be constitutional by the U.S. Supreme Court.

Under current New Mexico law, a single corporate entity operating in multiple states must determine its in-state income by applying a three-part formula based on property, payroll and sales within the state as a percentage of property, payroll and sales everywhere.

Like all other states, New Mexico does not allow taxpayers to report their in-state income based on their own internal calculations of which parts of their operations are more profitable or less profitable than others.

Combined reporting merely extends these principles (and the formulary apportionment method) to commonly owned and operated corporations engaged in the same line of business in multiple states.

Requiring an economically integrated group of corporations to file as a combined entity when they are doing business as one unit makes good economic sense. Conversely, the current system allows corporations to game the system by “shifting” profits to artificial entities that purportedly operate only in “tax havens,” thus avoiding New Mexico corporate income tax on profits earned here.

These ploys have been investigated by and reported in the press. The so-called “Geoffrey Loophole” -– so named for the Toys R Us giraffe mascot -– has been covered by CNN. The Wall Street Journal has documented Wal-Mart’s multiple schemes, one of which has the retail giant paying itself rent for the use of its own stores.

New Mexico courts have addressed some of the methods that multi-state corporations have used to evade our state’s corporate income tax in recent decisions involving Wal- mart and K-Mart. The Wal-Mart case was covered by the New Mexico Business Weekly.

But the fertile minds of corporate tax planners continually invent new methods to avoid paying taxes. Requiring multi-state corporations to pay under the combined method would head these ploys off at the pass.

New Mexico needs this popular, widely used and constitutionally permitted method for corporate income tax filers. The New Mexico Legislature should pass this long overdue reform in this session, as was recommended several years ago by the Blue Ribbon Tax Commission.

 

Gerry Bradley, a former economist for the state Department of Labor, is the research director for the Albuquerque-based nonprofit New Mexico Voices for Children.