Capital Goods: July 2012

Minding their business 

In each of the last three legislative sessions, lawmakers have tightened down on the rules that let the tax man go after recalcitrant corporate taxpayers. A lot of those corporations would dispute that “recalcitrant” characterization, which is one reason they have wanted to change the rules. In each case, they’ve invoked the mantra of tax fairness when demanding new ones. Though the rules might not always have been applied fairly, there is quite a bit of evidence, documented in court cases that went in the state’s favor, that some big multistate corporations have shifted income earned in North Carolina to states such as Delaware that don’t have corporate-income taxes to reduce what they owed here.

Let’s cut through the posturing: Nobody — not me, not you, not the mechanic down the street and certainly not the chief executives of big-box retailers — enjoys paying taxes. As conservative pundit John Hood wrote a couple of years ago, “The truth is that any officer of a corporation who fails to structure his business under the law to maximize profits and minimize tax liabilities is in violation of his responsibility to his shareholders.” The truth also is that corporate officers spend a lot of money employing lobbyists to influence how laws are written to minimize tax liabilities.

In 2010, those efforts involved legislation ordering the state Department of Revenue to come up with stricter guidelines for when it decides to impose penalties on corporate taxpayers. Last year, legislators rewrote the law that allows state tax collectors, when they suspect income shifting, to consider a multistate company’s total income and apportion an amount that was earned here. The changes permit the department to pursue consolidated returns only when it can be shown there was no “reasonable business purpose” for shifting income. This year, lawmakers have been considering legislation that would put the yoke of the state’s formal and lengthy rulemaking process on the department as to when it can order a consolidated return. Right now, the agency can issue a quick directive, independent of outside review, spelling out how it will enforce the law.

See a trend here? Legislators, whether the new Republican majority or the Democrats just before they lost their majority, have been swayed by arguments that the state needs to be more sympathetic to the corporate taxpayer. Maybe that’s because they keep getting hit over the head, time and again, with the fact that, among Southeastern states, only Louisiana has a higher corporate tax rate than North Carolina’s 6.9%. Or maybe it’s because the state has had its share of high-profile misses in recruiting large industrial projects.

Still, in the rush to help the big boys, it’s worth remembering that the bulk of businesses in North Carolina are limited-liability companies, partnerships and sole proprietorships, which don’t pay corporate-income taxes. Their profits ultimately are taxed as individual income, revenue from which accounts for roughly half of the state’s general revenue and totals nearly 10 times that from corporate taxes. And when you give tax breaks — or allow tax avoidance — by one set of taxpayers, you’re likely to put pressure on other sets of taxpayers.

This tinkering with corporate-tax rules comes amid growing talk of legislators taking another stab at a major tax overhaul in 2013 (“Time for a Change,” May). In the past, such talk (and that’s really all it ever has been) has centered on reducing sales- and income-tax rates while expanding the sales-tax base to include more services. The Republicans now in charge, particularly in the state Senate, have other ideas. They would like to not simply lower the corporate-tax rate but eliminate it. They might even try to do away with all state income taxes, period.

Call me skeptical. As already mentioned, the income tax is a huge part of what runs state government. Combined, corporate and personal income taxes brought in $10.7 billion last year. The sales tax accounted for $5.8 billion. That sales-tax base would require a lot of expansion to make up the difference. There’s also been talk about beefing up the franchise taxes businesses pay. Again, that would be a lot of beefing up. Franchise taxes brought in a grand total of $607 million in the 2010-11 fiscal year — just 3% of general tax revenue.

Makes you wonder whether the executives whose companies pay the corporate tax have much confidence that major tax reform will occur. After all, why expend all this energy on changing rules if you believe the corporate income tax is about to go away?

Scott Mooneyham is editor of The Insider, www.ncinsider.com. Email him at smooneyh@ncinsider.com.