Chairman Evans and other members of the Committee, thank you for holding a hearing on this important topic. I am submitting written testimony on behalf of the DC Fiscal Policy Institute, because I am unable to attend the hearing. DCFPI engages in research and public education on the fiscal and economic health of the District of Columbia, with a particular emphasis on policies that affect low”‘ and moderate”‘income residents.
I strongly support this bill, which would make significant improvements in the District’s corporate income tax laws. As the Center on Budget and Policy Priorities has noted, “The corporate income tax laws of the majority of states are riddled with loopholes that permit many large multistate corporations to avoid paying tax on a significant share of their profits.”[1] In the District, roughly four of five corporations pay only the minimum corporate income tax of $250, which suggests that many are taking advantage of loopholes to avoid paying taxes to the District.
Closing these loopholes is important to the integrity of the District’s tax system, and it would raise needed revenues without increasing tax rates. Currently, many corporations that do business in the District, earn profits in the District, and use District-funded services pay only a modest tax on their profits. When these corporations are not paying their fair share, it limits revenues that can be used to support key public services and it forces other businesses and residents to bear a larger share of the responsibility for funding DC government.
The Corporate Income Tax Base Protection Act would make two key improvements: it would close a loophole that allows corporations to shift their DC-based profits to holding companies established in tax haven states such as Delaware and Nevada, where the profits are not taxed. The bill also would broaden the definition of “business income” ‘ the income that multi-state corporations must apportion for tax purposes among the states in which they do business ‘ to the fullest extent allowed under Supreme Court decisions. Both provisions are designed to eliminate fully two avenues for shifting income and profits in ways that result in tax avoidance.
While some corporations may argue that closing these loopholes will hurt the District’s business climate, it is worth noting that the District is not unique in taking these steps. Half of the states with a corporate income tax have enacted legislation that closes the Delaware holding company loophole, and nearly half have adopted a broad definition of apportionable business income. Moreover, the current loopholes damage the business climate by limiting funding for public services that businesses need ‘ such as transportation, public safety, and education ‘ by forcing businesses that cannot take advantage of the loopholes to bear an unfair share of the tax burden.
I urge the Council to support the Corporate Income Tax Base Protection Act of 2003. Thank you.
End Notes:
[1] Center on Budget and Policy Priorities, “Closing Three Common Corporate Income Tax Loopholes Could Raise Additional Revenue for Many States,” 2002, p. 1. (http://www.cbpp.org/4-9-02sfp.htm)