In response to this year’s push by the General Assembly to weaken the state’s safeguards against corporate tax dodging, the NC Justice Center recently launched a petition asking the General Assembly to adopt a key corporate tax reform that would nullify many of the strategies some corporations use to avoid paying state corporate income taxes.
From the petition:
But here’s the good news: there is a simple way for our policymakers in North Carolina to crack down on corporate tax dodging. All they have to do is require corporations to pay taxes on profits earned in states where they do business. This common-sense idea, called “mandatory combined reporting,” could raise up to $100 million each year in North Carolina.
In a report issued earlier this year, the NC Budget and Tax Center described how large corporations are able to take advantage of tax shelters because most of them are structured as parent corporations that each own many separate subsidiary corporations operating in many states. In states without mandatory combined reporting, multi-state corporations are able to shift income earned in one state to related corporate subsidiary in a state without a corporate income tax or with special corporate tax exemptions.
Mandatory combined reporting works by requiring parent corporations and their subsidiaries to “combine” for state tax purposes to file a joint tax return. The profits of the combined corporation are apportioned by formula to each state according to the share of total business activity located in each state.
This is not an issue that traditionally divides along partisan or ideological lines. Charles McClure, senior fellow at the conservative Hoover Institution and former Deputy Assistant Secretary of the Treasury under President Reagan wrote that “failure to require unitary combination [i.e. combined reporting] is an open invitation to tax avoidance.” And when replacing the Michigan Business Tax with a state corporate income tax this year, GOP Governor Rick Snyder and the GOP-led Michigan legislature chose to use mandatory combined reporting.
North Carolina’s current corporate tax system was not designed for today’s economy, where such a large share of corporate business in the state is undertaken by national and multinational corporations conducting most of their business in other states. This petition gives North Carolinians the chance to let policymakers know that a modern corporate income tax is necessary to ensure that people and corporations all pay their fair share in taxes.