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Combined Reporting Not a Surefire Revenue Raiser

The National Conference of State Legislatures’ Task Force on State and Local Taxation of Communications and Interstate Commerce commissioned Drs. Bill Fox and LeAnn Luna, economists with the University of Tennessee, to study the current economic realt

December 8, 2010

The National Conference of State Legislatures’ Task Force on State and Local Taxation of Communications and Interstate Commerce commissioned Drs. Bill Fox and LeAnn Luna, economists with the University of Tennessee, to study the current economic realties of mandatory unitary combined reporting. The report, entitled Combined Reporting with the Corporate Income Tax: Issues of State Legislatures (Nov. 17, 2010), is intended “to explain the features of combined reporting and to analyze the key issues that states should consider when determining corporate tax structures, and specifically the relative merits of separate and combined reporting.”

Of its various findings, the Fox Report most notably concluded that combined reporting should not be used as a revenue raiser to close states’ budget holes, stating “[c]ombined reporting has no direct effect on state tax revenues.” Rather, if a state’s goal is an immediate increase in corporate income tax revenue, adoption or expansion of the use of intercompany expense addback statutes is a much more effective means of achieving this goal than adoption of combined reporting.

The Fox Report further advises, “[l]awmakers considering a move to combined reporting should consider the immense complexity the reporting regime will introduce” and such “complexity comes with a great amount of uncertainty.” Indeed, such advice is generally echoed by the multistate tax community and supported by similar recommendations made by the Maryland Business Tax Reform Commission and Virginia’s Joint Legislative Audit and Review Commission to their respective state legislatures.

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