Next time you head to Starbucks, CVS or McDonald’s, consider this: A weakness in DC’s corporate income tax has allowed each of these multi-state corporations’and many others’to avoid paying DC taxes on the profit you help them earn here in the District. The DC Council took initial steps in 2009 to close this corporate tax shelter, with an implementation date of January 2011, but it has not yet passed implementing legislation so it cantake effect. It’s not too late, but the Mayor and Council need to act soon. If they fail to implement this critical tax reform, $22 million will be added to next year’s budget shortfall.
Which means that local taxpayers’residents and businesses who can’t move what they earn in DC to another state’will have to pay up even more.
This corporate tax reform known as “combined reporting” is already done in a majority of states that have a corporate income tax. Keep in mind the District faces an estimated $400 million budget shortfall for Fiscal Year 2012. Failing to follow through on combined reporting would increase the budget gap by an additional $22 million, according to Chief Financial Officer Natwar Gandhi. The time for action is now.
Combined reporting treats a parent company and its fully-owned subsidiaries as one corporation for state business tax purposes. Current DC law allows multi-state corporations to shift the profits they make in DC onto the records in other states that have lower — or no — business tax. This means that while local businesses are paying taxes on all profits made in the District, multi-state companies such as Home Depot, CVS, and the Gap are able to shirk their responsibility’legally. Combined reporting prevents such tax sheltering by calculating the corporate income tax owed based on the percent of business operations that take place in a state as a share of the company’s overall operations.
Mayor Gray and the Council have a huge task ahead of them to balance the 2012 budget and maintain services that DC residents rely upon. They should not make the problem worse by continuing to let multi-state coporations off the hook when it comes to paying DC taxes.
For more on combined reporting, see DCFPI’s October report here.
