March 8, 2011

Open Thread: Combined Reporting, Good Idea or Not?

Carroll Andrew Morse

Rhode Island Governor Lincoln Chafee has proposed "combined reporting" in his FY2012 budget proposal as a means of raising revenue for Rhode Island. Given this is the most technical of the Governor's major proposed "revenue enhancers", the floor is open for any insights into the details of how and why "combined reporting" is supposed to work.

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First, you have to believe that corporations (largely "chain store" retailers) are "evading" taxes by exercising their legal options (known to some as "loopholes").

What goes on is corporations create "subsidiaries" to hold certain assets, such as the real estate, "trade mark", or heavy equipment. These subsidiary entities are usually domiciled in Delaware, because of its light corporate taxation. The Rhode Island stores pay "rent" to these entities for use of the real estate, trademark, or equipment (there may be other "rented" assets depending on the type of business). This rent, paid to an out of state entity, is a legitimate business deduction from their Rhode Island taxes. Consequently, they pay less Rhode Island taxes as a result of these deductions. "Combined reporting" would, in essence, require the other entities to pay tax on income derived from Rhode Island.

This is not all a day at the beach for the stores. Having numerous related entities, unless wholly owned, can create problems, such as "upstream guarantees", with obtaining financing. So, there are trade offs.

Posted by: Warrington Faust at March 8, 2011 10:31 PM

Chafee, who is an economic illiterate, is missing a small, simple fact: Rhode Island is a small state and its people can go outside the state to buy goods and services. The solution to our state's problems is not to become less competitive, but to become more competitive.

The speech got me thinking about other small economies that I've known in my travels. In particular, Hong Kong and Ireland resemble Rhode Island in many ways: small land area, well-located for trade, not much in natural resources. Both countries created fast-growing, strong economies based on human capital (knowledge, skills, work ethic) by having low taxes a high degree of economic freedom (i.e., businesses not hostage to politicians and unions), and traditional systems of education rather than the counterproductive, Marxist theories prevailing in RI schools today.

Isn't a "knowledge economy" what Chafee says he wants? The problem is, Linc, that the smart people who comprise the knowledge economy are smart enough to know a bad deal when they see one, and they will leave RI for competitive states. If your budget passes, I'll be one of them.

Posted by: BobN at March 9, 2011 8:42 AM
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