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Wednesday, July 27, 2011

Walker's New Corporate Tax Loopholes

New tax breaks for businesses are not tied to job creation

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Remember when Republicans whined and wailed about the Democrats' implementation of combined reporting, which the GOP claimed was hurting Wisconsin's business climate by hiking taxes on corporations?

Remember when Republicans vowed to repeal the law?

Well, Republicans have had the opportunity to repeal combined reporting for multistate businesses, but they haven't taken it.

Instead, Republicans have kept the law but have added loopholes potentially so big that the nonpartisan Legislative Fiscal Bureau (LFB) cannot estimate how much revenue the state will lose.

Nor can the LFB support the assertion that the loopholes will create any jobs in the state.

The LFB says that the new loopholes will do is reduce corporate tax collections by at least $46 million by the end of 2013, slash the power of the Department of Revenue to clamp down on corporate tax cheats and ask the taxpayers to assume the responsibility for risky bets taken by businesses.

Writing Off Business Losses

Most of the public focused on Gov. Scott Walker's biennial state budget's slashing of funds for public schools, local governments and public employees.

But tucked into Walker's original proposed budget were two corporate tax changes that could have a big impact on the state's tax revenues.

(Walker's spokesman, Cullen Werwie, did not respond to the Shepherd's request for comment for this article.)

One of Walker's changes makes it easier for corporations to reduce their income for tax purposes. Currently, if one subsidiary of a parent corporation incurs a loss, only that subsidiary can write off that loss. With Walker's change—which was approved in the final version of the budget—all of the corporation's subsidiaries can write off a portion of that loss, too, for the next 20 years. That reduces the income of the profitable units, which then lowers their taxes.

In addition, Walker's change is retroactive to the tax year of 2009. That means that the big losses sustained by businesses in the 2008 economic meltdown can now be written off by currently profitable companies.

The state LFB said about 400 businesses would be able to use this loophole. The agency estimated that the state would lose $9.2 million in revenue this year and an estimated $37.2 million in 2012-2013.

Jack Norman, research director of the Institute for Wisconsin's Future (IWF), wrote about Walker's new loophole in IWF's new monthly newsletter, “Who Does Not Pay Taxes?” Norman said the most obvious beneficiary of the loophole was Marshall & Ilsley Corp., which was recently taken over by BMO Harris Bank. M&I Corp. lost $2 billion in 2008 and an additional $758 million in 2009. Most of those losses came from its subsidiary M&I Bank. But other subsidiaries—such as M&I Trust—remained profitable.

“What this new loophole does is that it allows [M&I Trust] to use the bank loss in 2008 to offset not just future profits at the bank but also at the trust company and the other subsidiaries,” Norman said.

So will the new loophole free up corporate income so that businesses will create jobs within the state?

The short answer from the LFB is no, because the loophole is not tied to any job-creation requirement.

What the change will do, the LFB wrote in a May memo explaining the changes, is encourage companies to make more risky investments because it will be easier to write off their losses.

“Risk is not eliminated by the allowance of loss carryforwards but, instead, it is shifted to the government,” the LFB memo concluded.



Weakening Tax Collectors

Although the first corporate tax loophole will cost the state almost $50 million in the next two years, IWF's Norman said yet another corporate tax break in Walker's budget could be even bigger.

In this provision, Walker and his Republican allies have weakened the Department of Revenue's ability to crack down on corporate tax cheats.

Currently, multistate companies that do business in Wisconsin are able to group subsidiaries that are relevant to the state. Those subsidiaries then pay taxes in Wisconsin if they are profitable.

Companies are not able to arrange their subsidiaries solely so that they can avoid paying taxes—for example, Norman said, by including a subsidiary with huge losses that ultimately pulls down the income of profitable subsidiaries under the corporate parent's umbrella.

The state Department of Revenue is able to challenge the grouping of corporate subsidiaries if they are arranged in such a way to avoid paying taxes in Wisconsin.

But with Walker's change, the state Department of Revenue would no longer be able to challenge these arrangements. If a multistate corporation wants to arrange business units to avoid paying taxes in Wisconsin, it may do so without a legal challenge from the state.

Like the other corporate tax loophole devised by Walker, this one is retroactive to Jan. 1, 2009, too.

The state LFB couldn't estimate how many corporations would take advantage of this provision, nor how much money the state would lose from corporate tax avoidance.

IWF's Norman said, “This has the potential to be huge.”

He said the state already has a tax gap—the difference between taxes owed and taxes collected—of hundreds of millions of dollars. Walker's changes, however, would reduce the amount of taxes owed by an unknown amount, never to be collected. Nor is this tax break tied to any job creation or economic development measure.

“It gives them [corporations] the freedom to make combinations that are put together solely to avoid taxes which under normal circumstances would be illegal,” Norman said.