Loopholes in Tax Talk

According to recent reports, Iowa has been losing an estimated $60 million to $100 million annually due to corporate tax loopholes. These loopholes allow multistate companies to shelter their income from Iowa tax, exploiting cracks in the tax code and enabling them to avoid taxes that their Iowa-based competitors must pay. Although such strategies are technically legal, they have significant repercussions on the state’s revenue.

This loss is primarily due to profit-shifting by multistate corporations when they move their profits to low-tax states, causing Iowa to lose a considerable amount of revenue. This is a loophole in the tax code, and the cost is borne by others through higher taxes or lost services. Families cannot use such gimmicks since they do not have the option of shifting accounting for their income to other states.

Fortunately, twenty states have implemented combined reporting to address such aggressive tax avoidance, and several neighboring states, including Nebraska, Illinois, Minnesota, and Kansas, have already adopted it. If Iowa were to follow suit, 99% of the added revenue would come from corporations headquartered outside of Iowa.

The Iowa Association of Business and Industry (ABI) has claimed that these tax-avoidance strategies do not use “loopholes” but rather legal options. However, the reality is that they still exploit the tax code, which costs the state significant revenue. Opponents of combined reporting often cite the myth that Florida repealed it due to economic development problems. However, it is worth noting that Florida adopted worldwide combined reporting, which is different from the “waters edge” or domestic combined reporting adopted by other states. It was repealed due to political pressure from the Reagan administration, and none of the 16 states that adopted combined reporting have repealed it.

Implementing combined reporting in Iowa would help Iowa-based and Iowa-focused businesses compete better with out-of-state companies that would lose a tax advantage. It is not a tax increase, but an accountability tool to enforce the existing tax code against tax-avoidance gimmicks. Some representatives of ABI have given conflicting views on combined reporting, with some calling it a “tax increase” and others stating that “some companies would pay more, some would pay less.”

In conclusion, plugging corporate tax loopholes in Iowa is essential to ensure that the tax code is fair and to prevent others from paying for the tax-avoidance gimmicks used by multistate corporations. Combined reporting has been adopted by 20 states, and it is time for Iowa to join them to address aggressive tax avoidance and protect the state’s revenue. It would also benefit Iowa-based businesses and jobs in their competitive standing with out-of-state competitors. Ultimately, adopting combined reporting is a crucial step towards creating a level playing field for businesses and ensuring a fair tax system.

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