State Corporate Tax Shelters And The Need For “Combined Reporting”

Source: Michael Mazerov, Center on Budget and Policy Priorities, October 26, 2007

From the summary:
A growing number of states are adopting or considering a key corporate tax reform known as “combined reporting.” Most large corporations consist of a parent corporation and its subsidiaries; combined reporting effectively treats the parent and most or all of its subsidiaries as a single corporation for state income tax purposes.

Almost half the states with corporate income taxes have adopted combined reporting. Five states have enacted the reform in the last three years, and several others have seriously considered doing so. A major reason for states’ growing interest is their recognition of how badly corporate tax shelters that exploit the lack of combined reporting are eroding state corporate tax payments. Corporations have devised a wide variety of strategies to artificially shift profits to out-of-state subsidiaries. Combined reporting largely negates these strategies by enabling the state to tax a fair share of the profit shifted into a related, out-of-state corporation.

This report discusses some of the corporate tax-avoidance strategies to which non-combined reporting states are most vulnerable and explains how combined reporting can help a state preserve a strong and fair corporate income tax.

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