COLUMBIA TRIBUNE February 22, 2005
A bit of a stretch
Lobbyists target loopholes they say shortchange state.
By KEVIN COLEMAN of the Tribune's staffThere's one named after a giraffe and one called "single factor apportionment." In between there are numerous names for what citizen watchdog groups regard as loopholes in state tax laws that create leaks in the revenue stream to the state.
Business interest groups warn that tampering with the tax system can threaten economic growth, and they say the less tax the better. Missouri Chamber of Commerce and Industry President Daniel Mehan's "unfinished business" agenda for the current legislative session includes corporate tax reduction as a goal.
Missouri's corporate taxes include a state income tax and a franchise tax that, combined, are expected to contribute about $481.8 million to the gross receipts projected in Gov. Matt Blunt's proposed budget for 2006. The net amount of receipts, however, is $341.8 million after estimated refunds are subtracted.
Mehan concedes it will be tough to secure much corporate tax relief this legislative session given a tight state budget and proposed cuts to Medicaid, education and other social programs. For now, he says, the Chamber will focus on workers' compensation, tort reform and unemployment insurance.
While business groups are focused on those issues, citizen groups are steamed that health and education programs are on Blunt's chopping block while, in their view, corporate taxpayers are doing a Mexican hat dance around state income tax laws.
One such social program in jeopardy is First Steps, which helps children with developmental or physical disabilities. And that has raised the hackles of John Hickey, executive director of the Missouri Citizen Education Fund.
"First Steps is a program for physically handicapped 1-year-old kids," he said. "What are they going to do? Go out and get a damn job?"
The problem, Hickey says, is not excessive social programs; it's that corporations are paying less each year.
State budget data seem to support this conclusion. In fiscal 1996, net corporate tax receipts were $477.3 million, or about 9 percent of the general revenue fund. For fiscal 2004, net corporate tax receipts were $304 million, or about 5 percent of the general revenue fund.
By another measurement, corporate income tax receipts as a percentage of the state's gross product have dropped 56 percent since 1989.
Tom Kruckemeyer, former chief economist for the state's office of budget, says the state is consistently at or near the bottom of corporate income tax receipts per capita compared with all other states that have a state income tax.
A recent report by Citizens for Tax Justice, the Institute on Taxation and Economic Policy and Missourians for Tax Justice provides more fodder for the argument that corporations are not paying a fair share.
The report, which can be viewed at www.ctj.org, lists 71 of the 252 profitable companies on the Fortune 500 that paid no state income tax in at least one year between 2001 to 2003. The list includes major corporations that do business in Missouri, such as Merrill Lynch, Boeing, Toys "R" Us, Sears, Southwest Airlines, SBC Communications and Marriott International.
Hickey says Merrill Lynch stands out as a prime example of the problem. The company paid no state income tax during those years, even though it reported $8.8 billion in pretax profit,according to the report.
Overall, the 252 companies paid state income taxes that averaged 2.3 percent of their profits, although the average statutory rate for the country is 6.8 percent. Missouri-based corporations on the list all had three-year average state income tax rates less than the state's statutory rate of 6.25 percent: Emerson, 1.5 percent; Leggett & Platt, 1.9 percent; Graybar Electric, 2.5 percent; Anheuser-Busch, 4.7 percent; and May Department Stores, 4.9 percent.
The actual rate of tax paid can be less than the statutory rate because of various legislative tax credits and economic incentives that lower the tax bill. But Hickey takes aim primarily at the quirks or legal loopholes in the law that companies have used to shield income from state income tax.
"Corporate tax loopholes are like a virus," he said. "There are new ones being created all the time. The result is that the individual taxpayers end up paying more, or we cut education and health care."
Reports from Missouri Citizen Education Fund, Citizens for Tax Justice and other citizen groups have identified numerous loopholes or quirks in the tax law they want fixed. A sample from their reports add up to an estimated annual benefit to the state of more than $110 million if amended by legislation:
* "Single-factor apportionment," which relates to the calculation methods multistate corporations are allowed to use for allocating earnings to states where they do business. Estimated benefit, $77 million.
* The 2 percent discount for timely filing and remittance of state withholding taxes paid by employees. Estimated benefit, $18.4 million.
* The so-called "Geoffrey loophole," named after the Toys "R" Us trademark giraffe. This is an emotionally charged symbol of bogus transactions - bookkeeping abracadabra---designed to avoid state income tax.
The Geoffrey loophole works like this: A company sets up a Delaware corporation that charges royalty fees for trademark use by company stores. The intercompany fees are a deduction for state income tax, but are not taxed as income in Delaware. Estimated benefit is $15 million.
Last week, Sen. Joan Bray, D-St. Louis County, filed SB 360, a bill that proposes to modify state tax laws to plug loopholes and eliminate giveaways, including single-factor apportionment, the timely filing discount and the Geoffrey loophole. The fixes add up to an estimated annual revenue increase of $170 million.
"These are all reasonable ideas," Bray said. "These are not outrageous or onerous. These are ideas that many other states have done in some fashion to try to get additional revenues. I believe we should be doing this to help ease the pain of poor people."
She hopes for bipartisan support to enact at least some of the proposals in the bill. The bill was referred to the Senate Ways and Means Committee last week.
The corporate franchise tax, which dates to 1917, is a tax the state chamber of commerce loves to hate.
"We'd love to eliminate the franchise tax," Mehan said. "You have to pay a tax just to do business in Missouri, and that's a disincentive. It's a burdensome tax. No, actually it's a nuisance tax."
All corporations registered to do business in Missouri are required to file a franchise tax return, although the tax is levied against corporations having assets of more than $1 million. The tax rate is one-thirtieth of 1 percent of the book value of specified assets used in Missouri or allocated to Missouri. That changed in 2000 from $200,000 and one-twentieth of a percent - another reason for the decline in corporate tax receipts.
The franchise tax return, filed along with the corporate income tax return, added an estimated $91 million last year to state coffers.
Republican Ed Robb, who represents Columbia, is an economic consultant who favored elimination of the franchise tax during his race for the General Assembly last year. Robb says the combination of a corporate income tax and the franchise tax creates two tax categories - a tax on income and a tax on wealth - and he says that's not equitable.
"The franchise tax is a special tax on corporations that other business forms don't pay, like LLCs and sole proprietorships," he said. "It's better for economic development to have a tax only on profits."
Mehan says Robb's logic is right on target. "What if you're a startup or having a downturn? If you have assets and the revenues are off, it's no reflection on how your business is doing," he said. "You're just here and you have assets."
Robb says one solution is to raise the corporate income tax rate enough to make up for the annual revenue lost from eliminating the franchise tax.
Mehan says business interests might need to be satisfied with gains made in recent years to shield small business from the franchise tax by raising the total asset threshold. But he's not throwing in the towel on scrapping the franchise tax. If he sees an opening, the issue will be pushed.
"We'll see how the economy ticks along and how the numbers come in," he said.
Pat Martin, chairwoman of Missourians for Tax Justice, is not optimistic that action will be taken this session to reform tax laws because of the influence of big business in Jefferson City.
Still, she thinks it's good that citizens are protesting the proposed cuts to social programs.
"I think the outcry from people is wonderful," she said. "It's just too bad that they have to feel threatened before they demand that the governor and legislators do their job."
Doing their job, she says, means being realistic about the revenue needed to fund state government. Closing tax loopholes is a good step, she says, adding that closing loopholes is "a drop in the bucket" for the revenue the state needs. For now, she would be satisfied with simply more awareness.
"What we need is a state disclosure law so we can learn which companies are avoiding paying taxes to Missouri and which are paying their fair share," she said.
Reach Kevin Coleman at (573) 815-1709 or kcoleman@tribmail.com.
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