Columns » Ernest Dumas

The 'worst' bill


The last person a state lawmaker wants to see is a business lobbyist at the door of the tax committee room. It means that if he votes the other way his opponent will be well heeled at the next election. So it was that the House Revenue and Taxation Committee the other day stomped on a little corporate tax bill, numbered HB 1105, while the committee was in search of money to better the schools. The bill would have fulfilled that role by recouping up to $75 million a year that multistate corporations started avoiding through schemes created by big accounting firms in the 1990s. Arkansas corporate income taxes began plummeting in 1998 although profits soared and the number of corporate tax returns sharply increased. Tax-avoidance schemes like those that would have been corrected by HB 1105 were responsible. Lobbyists for the state Chamber of Commerce/Affiliated Industries of Arkansas and major corporations lined the committee room to tell about the horrible consequences if HB 1105 became law. Many businesses wouldn't come to the state and many might leave, they said. A few days after the committee left the bill for dead, the Arkansas Democrat-Gazette, in the classical way of editorial writers, rode onto the field and shot the wounded. The paper called the bill the "worst bill so far" of a legislative session full of bad bills. "No, no, no to HB 1105," the headline said. It referred sarcastically to the authors of HB 1105 as "some of the geniuses at the legislature." Actually, the genius was Rep. Philip Jackson of Berryville, a conservative Republican businessman. Jackson had attended national legislative conferences where tax experts described the schemes that were bringing down tax collections in nearly all the 45 states with corporate income taxes. Seventeen states have plugged the loopholes. One might surmise that the Democrat-Gazette editorial page was paid a visit by the parent company's accountants, but that can't have happened because the paper, as it so often notes, maintains fire walls between its various parts to preserve its editorial independence. The editorial did note that its parent corporation operates in several states and would be subject to any combined reporting requirements. So what exactly would the worst bill of the legislative session have done? Some genius at one of the big accounting firms - it could have been Arthur Anderson - dreamed up the idea of setting up a passive investment subsidiary in states with favorable tax codes or no income tax at all and then assigning profits from burgeoning operations in other states to it, thereby avoiding taxes on the profits. One of the Big Oil companies might have service stations all over Arkansas and marketing, exploration or other subsidiaries in a state like Texas, which has no corporate income tax (but with a corporate franchise tax that now works much like an income tax) or Delaware, which has a tax but exempts subsidiaries that are limited to collecting income from intangible assets like a trademark. Subsidiaries in other states charge the operating companies in Arkansas exorbitant prices for gasoline and other petroleum products so that the stations actually show no profits or even a net loss. The company meantime reaps record profits while reducing its state-level taxes to near zero. Or take the example of Toys R Us. It set up a subsidiary in Delaware known as Geoffrey Inc., which owned the company's trademark giraffe. Geoffrey charged operating subsidiaries in states with income taxes large royalty payments for use of the company name, trademark and merchandising skills. Or take the Limited/Victoria's Secret/Lane Bryant/Express retail conglomerate, which earned $949 million in royalty income in three years by licensing the companies' respective trademarks back to the stores, which wound up with little or no profits to report. Jackson's little bill would have stopped these practices by requiring unitary corporations like those to combine their profits across the states and apportion a proper share under national apportioning schedules to Arkansas. The state already allows them to apportion their losses in other jurisdictions to reduce their Arkansas taxes. You will not be surprised to learn that the chamber and, apparently, the Democrat-Gazette don't want to change that. Use of these tax schemes has mushroomed so that in states like Delaware and Nevada (it has no income tax) formation of subsidiaries has become a cottage industry. In Nevada, 132,000 corporations have been established with not a single employee. The Wall Street Journal identified Tyson Foods as one of the big corporations that set up a passive subsidiary in Delaware to avoid state income taxes. Oh, the chamber of commerce said corporations were willing to pay their share of school improvement and wouldn't stand in the way of sales taxes or a tiny increase in the corporate franchise tax, a levy based on a company's capital stock. It is a nearly invisible tax - it gleans $8.5 million a year - that levies about the same little nuisance fee on corporations big and small. It's full of loopholes, too. For example, the tax on no-par-value stock is $25 a share although the stated value of the stock, as in the case of one giant family-owned company, may be $400,000 a share. But even that tax was too much. Republicans (sans Mr. Jackson) voted against it and the bill went down. That is what they mean by corporate responsibility.

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