This legislative session has produced an abundance of bills that afford people a good measure of who their lawmakers really represent. Joe Taxpayer will usually discover that it is not he.
Here’s the best bill to watch: HB 2686 by Rep. Phil Jackson of Berryville, a conservative Republican businessman. It would make hundreds of big multistate corporations pay income taxes again on their Arkansas profits just as do the small Arkansas businesses that compete with them.
Jackson’s bill won’t pass and it probably will not even get out of the Revenue and Taxation Committee of the House of Representatives, which killed it two years ago.
The big oil companies, General Electric, SBC Communications, Toys R Us and many of the largest and most profitable companies in America want the bill stopped in its tracks, but their lobbyists won’t make a direct appearance. The Arkansas State Chamber of Commerce, though it will have little understanding of the issue, will be on hand to say that it’s a terrible bill that imposes a new tax, which would set industrial development and economic growth back years. It would kill the goose that laid the golden egg. The tax climate would look so bad that we would never land a Toyota plant.
Not a word of it is true.
If 2003 is a clue, the Arkansas Democrat Gazette, itself a multistate conglomerate, will editorialize that it is the worst bill of the session.
Jackson’s bill would close a gaping loophole in the state’s corporate tax code that permits big multistate companies to assign their profits in states like Arkansas to passive subsidiaries — sometimes just a postoffice box — that they set up in states like Delaware and Nevada, which don’t tax corporate profits or else have nearly invisible taxes. Corporate tax consultants picked up on this weakness in state tax laws years ago and the practice has spread. No one has a good figure on how much taxes on Arkansas profits are being lost each year, but it is at least $30 million.
Despite a mammoth increase in profits the past dozen years, corporate income tax payments to Arkansas and most other states have been flat as the practice of shifting profits across state and national borders to tax havens has spread. Citizens for Tax Justice, which looked at shareholder reports from major national companies, reports that 270 of the largest corporations didn’t pay state taxes on two-thirds of their profits.
In the past 10 years, a period of high profit growth, corporate tax collections in Arkansas have risen only 5.5 percent, a fraction of the increase in most other taxes. From 1989 until 2003, Arkansas corporate taxes as a percent of the gross state product fell 23 percent.
Here is a good reflection of what has happened. The top corporate tax rate in Arkansas is 6.5 percent, about a fifth of the top federal rate of 35 percent. But in 2002 Arkansas collected only $218 million in corporate income taxes while Uncle Sam raked in $4.7 billion in corporate income taxes from the state, according to the IRS web site.
Big corporations, with help from the major accounting firms, turned their attention from federal to state tax avoidance in the 1990s. The legal legerdemain to skip state taxes is virtually limitless.
Big oil companies will charge high prices to their distribution outlets in Arkansas so that small profits will be reported and paltry taxes paid. The profits will flow to exploration or other subsidiaries in states with nonexistent taxes or unusually favorable treatment.
Toys R Us produced one of the more fetching schemes. It set up a Delaware corporation that owned its familiar trademark, Geoffrey the giraffe, and charged stores like those in Arkansas huge royalties for using the giraffe and the logo with the backward “R.” Profits in individual states then were negligible for tax purposes.
Kmart, a big competitor of Wal-Mart, set up a holding company that charged stores exorbitantly in places like Little Rock for using the Kmart name. A memo some years ago from its accountants at Price Waterhouse, which turned up in a New Mexico lawsuit recently, advised Kmart that the ruse would allow it to avoid taxes in places like Arkansas but not in states that required combined reporting. That is what Jackson’s bill would do. Arkansas taxes would be computed on a share of the combined profits of a company, not on its separate units.
(You’re wondering if Wal-Mart is a tax avoider. The word is no. It pays taxes on its Arkansas profits.)
The Council on State Taxation. a trade group of 570 multistate corporations, gets the word out to state chambers when states try to close these loopholes. Seventeen states, most of them “red” states controlled by Republicans, have adopted laws similar to Jackson’s bill.
How does all this affect you? You paid an income tax surcharge the past two years and you’re paying a higher sales tax because corporate tax accountants keep coming up with clever ways to avoid their fair share. You get to make up the difference, with the help sometimes of your representative or senator.