Iowa has an opportunity to level the playing field for local businesses by closing corporate tax loopholes and generating up to $100 million annually. This can be achieved by adopting “combined reporting,” a corporate-tax accountability tool already adopted by four neighboring states and 20 overall. This tool would prevent multistate companies from using tax avoidance schemes to avoid paying Iowa taxes, and make it harder for them to hide their taxable Iowa profits.
The change in law would not allow states to tax a company’s income from out-of-state business, but it would prevent companies from hiding their income by using tax avoidance schemes to shift their profits to a no-tax state. Iowa businesses would still be taxed based on income from sales within the state, and combined reporting would only ensure that profit from all Iowa sales is accurately determined for tax purposes. This would eliminate the unfair advantage that multistate companies currently have, as they use tax avoidance schemes to shelter profits from Iowa taxes.
Big multistate companies, such as Wal-Mart, have avoided about $350 million in tax payments to various states by creating a so-called Real Estate Investment Trust (REIT) in Delaware. With a REIT, Wal-Mart effectively charges itself rent for its own stores in local communities. The rental charge reduces the income for each store, and the profits go to the REIT but are exempt from tax in Delaware. Eventually, the profits reach Wal-Mart headquarters as dividends that are free of state taxes in its home state of Arkansas. Such tax avoidance profit-shifting strategies could be blocked by combined reporting.
States such as Illinois, Nebraska, Minnesota, and Kansas have already adopted combined reporting. Closing tax loopholes for multistate firms would be beneficial for businesses that want to see businesses locate or expand in Iowa. Iowa-focused firms selling the same products or services as the big multistate firms would no longer be at a competitive disadvantage. The Iowa Department of Revenue found that this change would boost revenues and not harm Iowa-based businesses. In tax year 2002, combined reporting would have generated an additional $99 million in corporate income tax revenue, and $62 million in tax year 2003. In both years, 99 percent of the increased revenue would have come from firms headquartered outside the state.
Overall, adopting combined reporting in Iowa would ensure that multistate companies are unable to use tax avoidance schemes to avoid paying Iowa taxes, and prevent them from hiding their taxable Iowa profits. It would benefit Iowa-based businesses and the state’s treasury, generating up to $100 million annually. This change would level the playing field for local businesses and encourage business growth in the state, as well as ensure that everyone pays their fair share of taxes.