Leveling the Playing Field: Plugging Wal-Mart Loophole Would Save Iowa Millions
By the Iowa Policy Project
IOWA
CITY, Iowa (April 11, 2007) – A tool to close corporate tax loopholes
could save Iowa up to $100 million a year and even the playing field
for Iowa businesses competing against multistate companies such as
Wal-Mart.
“Iowa businesses and Iowa’s treasury would both benefit from a simple
change in Iowa law that eliminates schemes that multistate companies
have used to avoid paying Iowa taxes that should have been paid all
along,” said Peter Fisher, research director of the nonpartisan Iowa
Policy Project and author of a new report for the Iowa Fiscal
Partnership.
“Corporations that earn income in Iowa are supposed to pay corporate
income taxes. But multistate companies have used tax avoidance schemes
to shelter profits from Iowa taxes under current law, giving them an
unfair advantage,” Fisher said.
Gov. Chet Culver – like Gov. Tom Vilsack before him – has proposed
adopting “combined reporting,” a corporate-tax accountability tool
adopted by four neighboring states and 20 overall.
Fisher said the change is needed.
“We all have responsibilities to pay taxes because we all benefit from
public services,” Fisher said. “That goes for corporations, too.
“This change would provide a way to combat the aggressive attempts to avoid taxes that are employed by big companies.”
Among those companies is Wal-Mart, which The Wall Street Journal
recently reported has avoided about $350 million in tax payments to
various states by creating a so-called Real Estate Investment Trust, or
REIT, in Delaware.
“With a REIT, Wal-Mart effectively charges itself rent for its own
stores in local communities,” Fisher said. “The rental charge reduces
the income for each store. The profits go to the REIT but are exempt
from tax in Delaware.
“Eventually, the profits reach Wal-Mart headquarters, but 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, which requires all corporations in an affiliated
group to combine income and expenses in calculating their income taxes.
Illinois, Nebraska, Minnesota and Kansas are among 20 states that
either have or have approved combined reporting.
“It doesn’t mean states get to tax a company’s income from out-of-state
business – it just means the company can’t hide its income by using tax
avoidance schemes to shift its profits to a no-tax state,” Fisher said.
“For Iowa, business taxes are based on income from sales in Iowa. This
would not change. What would change is that profit from all Iowa sales
would be more accurately determined for tax purposes. Big companies
based outside of Iowa couldn’t hide their taxable Iowa profits so
easily.”
Fisher said plugging such loopholes for multistate firms would be
business-friendly for those who 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,” he
said.
The Iowa Department of Revenue has found this change would boost revenues and not harm Iowa-based businesses:
€ An additional $99 million in corporate income tax revenue
would have been generated in tax year 2002 if combined reporting had
been in effect, 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.
The Iowa Fiscal Partnership is a joint tax- and budget-analysis
initiative of two nonpartisan, nonprofit Iowa-based groups, the Iowa
Policy Project in Iowa City/Mount Vernon and the Child & Family
Policy Center in Des Moines.
Blog For Iowa 
This would be a great idea.
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