Since the end of the 2018 legislative session, there has been an ongoing effort by large, multistate corporations to repeal “combined reporting” – one of the few components of House Bill 487 that cleaned up rather than expanded special interest corporate tax breaks. Kentucky’s adoption of combined reporting is an important and positive change in our tax code, closing a major loophole by requiring related corporations operating in Kentucky and other states to pay corporate income taxes based on a combined or “unitary” method of reporting. Kentucky is the 27th state to adopt this commonsense method of taxing multistate corporations.
Combined reporting makes our tax system more accurate and fair
Combined reporting is one of the primary methods identified by tax experts that can reduce the ability of large multistate corporations to take advantage of the differences between state tax codes by shifting income between related entities to reduce and in some cases eliminate tax liability in states. Combined reporting does this by requiring multistate corporations that typically include a parent corporation and multiple subsidiary corporations owned by the parent to report as one corporation for state income tax purposes. Profits earned by the related corporations nationwide are combined, and each state taxes a share of that combined income based on a formula that considers the level of activity in the state compared to other states. By treating related corporations as one entity, combined reporting removes the ability to shift profits from higher tax states to lower tax states, and provides a more accurate picture of the business actually conducted and profits actually earned by a related group of corporations.
In addition to generating revenue for public investments and making sure tax liability more closely reflects economic activity, combined reporting is also about fairness. Combined reporting helps to level the playing field for all businesses by making the overall tax system fairer, especially for smaller, in-state businesses that do not have the ability to reduce taxes through sophisticated, multistate planning strategies. When large multistate corporations pay less because they have the ability to shift income between states, others must pay more.
Repealing combined reporting would be another big tax cut for wealthy, out-of-state shareholders
The tax changes enacted during the 2018 legislative session already reduce taxes for corporations, especially those that operate nationally or internationally with significant property and payroll in Kentucky. As a result, there will be less revenue to fund vital public services that help grow our state economy. According to the Kentucky Office of State Budget Director, corporate tax changes in HB 487 will result in an estimated $72 million corporate tax cut in 2020.
Analysis from the Institute for Taxation and Economic Policy looks at who benefits from corporate income tax changes that were part of HB 487:
- 73 percent of the tax cut goes to the wealthiest 20 percent of taxpayers;
- 80 percent does not stay in Kentucky but goes to non-residents;
- 75 percent flows primarily to wealthy shareholders in the form of capital while just 25 percent will go to workers in the form of wages.
Repealing combined reporting would further increase the overall size of this tax cut, as well as the amount that goes to wealthy, out-of-state shareholders.
Special interest “concerns” about combined reporting are false
Special interest lobbyists argue that the combined reporting method is too complicated, and that it will hurt Kentucky’s economy. But these arguments are hollow. Kentucky was the 27th state to adopt combined reporting, which means that 26 other states have figured out how to manage it. The same multistate corporations pushing back in Kentucky are already using this filing method in many of the states where they do business – they know how to do it, and states know how to administer it. Further, research shows that corporate income taxes are not a big factor in corporate expansion and location decisions and many of the most economically successful states already require combined reporting.
The adoption of combined reporting is a positive step forward for Kentucky and for the small companies doing business in this state. It is fairer than the mandatory nexus consolidated or separate entity filing methods previously required by Kentucky, and presents a more accurate picture of the actual profits of large multistate corporations. And it generates much-needed revenue for Kentucky’s budget needs. For these reasons, it should be retained and the efforts to repeal it resisted.
