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Corporate tax law: Stupid is as stupid does

by Jim Longworth

My Aunt Peg told me the other day never to refer to someone as stupid.

“The more appropriate thing to say,” she advised, “is, ‘that the person did something stupid.’” But I am conflicted because that wise philosopher Forest Gump once said, “Stupid is as stupid does.” So what, then, should I say about the Republicans in Raleigh who recently passed a new law which will allow North Carolina corporations to pay their taxes in other states where they have subsidiaries, and where the tax rates are lower? How exactly should I characterize politicians who complain that the state needs to raise more revenues, then they vote to let companies pay their Tarheel taxes in another state? Are these politicians actually stupid? Or, did they just do something stupid? Before I answer that question, let’s examine the controversy more closely.

In the past, the NC Secretary of Revenue had the authority to require both in-state and out-of-state subsidiaries to file a joint tax return if there was evidence of the multistate corporation shifting income to avoid paying state taxes. But when the new law takes effect in 2012, the Secretary will only be able to require joint tax returns if transactions between subsidiaries have no “reasonable business purposes” other than reducing the corporation’s tax liability. According to NC Justice.org, this allows corporate accountants to restructure tax shelters to give the appearance of business purposes.

Earlier this year the NC Department of Revenue warned legislators not to change the tax law, saying it would result in a onetime loss of $510 million, and annual losses of $97 million. But Republican representatives pushed the bill through anyway, and our so-called Democratic governor signed it into law.

Citizens for Tax Justice say the new law will make North Carolina a “tax free haven for multistate corporations.”

To be fair, though, such companies have been playing fast and loose with taxes long before now. For example, according to NewRules.org, Toys R Us once shifted $55 million in profits to a Delaware subsidiary to avoid paying various state taxes. And, then there’s Wal Mart, who, according to Citizens for Tax Justice avoided paying over $4 billion in total state taxes from 1999 to 2005.

So while tax dodges are nothing new, the law passed last month in Raleigh legitimizes and encourages these kinds of business practices. Says the NC AFL-CIO, “The new legislation legalizes corporate tax evasion.”

Both parties say the new law needs to be tweaked before it goes into effect next year, but it needs more than tweaking. NC lawmakers need to rethink their mistake, and vote to repeal the bill before it can do real damage. They need to get in lockstep with 23 other states who require combined reporting of corporate income. NewRules.org explains that under that system, companies would have to total up their combined profits from all subsidiaries before determining what portion of those profits are taxable in each state.

Absent of such combined reporting, not only will North Carolina lose hundreds of millions of dollars in revenue over time, but we will be putting our smaller in-state companies at a distinct disadvantage as they try to compete with multistate stores who can charge less for their product because they aren’t paying any state taxes.

This new law is a loophole that will put North Carolina in a deep hole. It was ill conceived and passed in haste. So perhaps we should say that our lawmakers just DID something stupid. But they did it at a time when the State’s economy is bleeding red ink. So that makes them ACTUALLY stupid. Sorry Aunt Peg.

Jim Longworth is the host of “Triad Today,” airing on Fridays at 6:30 a.m. on ABC 45 (cable channel 7) and Sundays at 10 p.m. on WMYV (cable channel 15).

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