Insight: Targeting Big Business
By Jeff Schoepke, WMC Director, Tax and Corporate Policy

Last month the Legislature passed, and the Governor signed into law, an “economic stimulus” bill that imposes combined reporting for corporate income taxation. Combined reporting is a complicated, new and radically different system of corporate income taxation. It is also a $215 million tax increase on Wisconsin employers during the most severe recession in a generation. This bill was passed without a public hearing and less than 48 hours after it was introduced. Combined reporting will stimulate job loss, not job growth.

How did the Legislature sell a massive tax increase on employers, during the worst recession in a generation? They did it by demonizing corporate taxpayers, beating up on business for not paying it’s “fair share.”

Wisconsin spent itself into one of the worst state budget deficits in the nation. And the budget and budget repair bills would increase spending another 10 percent over the next 2 years. The Legislature has to get that money from somewhere, and they know they can’t sell higher taxes to already over-taxed voters. In total, the Legislature would increase taxes by more than $1 billion on businesses and investors of all sizes. In order to make voters feel like they aren’t getting hit again, they aim their cannons at “big business.”

What they do not understand, or they cynically forget, is the issue of tax incidence — who really pays a tax. The corporate tax may be popular among voters and, of course, corporations do not vote. Every tax, however, must be paid by people. The corporate income tax is no exception. In this case, some mix of workers, customers, or shareholders of a corporation pays tax. When the government levies a tax on a corporation, the corporation is in some ways more like a tax collector than
a taxpayer.

This does not mean, however, that corporate income taxes do not affect competitiveness. High taxes make Wisconsin goods and service more expensive, both in global markets and for our citizens. Taxes passed onto workers make it more difficult to recruit and retain highly-trained employees. And, capital flows to where profits are not penalized.

In addition to combined reporting, the Governor’s budget includes various other corporate income tax hikes, the two most significant of which include:

• Throwback Sales – Double the tax on “throwback sales.” These are sales of goods shipped from a taxable state to a non-taxable state that are “thrown back” to Wisconsin and “given” nexus here. This provision is a total corporate tax increase of $95.2 million.

• Domestic Production Activities Deduction Disallowance – Decouple Wisconsin from section 199 of the internal revenue code and disallow the federal deduction for qualified domestic production activities. This deduction provides a blanket 3 percent deduction (increasing to 6 percent and 9 percent in future years) for income arising from qualified production activities in whole or in
significant part based in the United States. Eliminating this deduction results in a $71.7 million tax increase on American jobs. For Wisconsin-only corporations, it is a tax on Wisconsin jobs.

Combined reporting, throwback sales, the domestic production activities deduction, and various other “smaller” items in the budget total more than $472 million over two years in corporate income taxes. In 2008, the corporate income tax raised just over $830 million in total. These proposed changes represent a 28 percent increase in corporate income taxes over 2008. Will this huge corporate tax increase finally equal the “fair share” that business critics believe corporations should pay? Given that multi-state corporations account for 35 percent of the filing corporations but pay 71 percent of total corporate income taxes, perhaps they already do?

The anti-business attitude amongst a loud minority in the legislature is both unfortunate and discouraging. In this recession, employers need the Government to help reduce business costs by eliminating red tape and passing tax policy that encourages growth. So far, however, they are simply funding higher spending by taxing corporate Wisconsin.

The Insight Column is a weekly column that provides commentary and background information
from WMC lobbyists on issues affecting your business. For more information on this topic, contact Jeff Schoepke, WMC Director of Tax and Corporate Policy, (608) 258-3400 or jschoepke@wmc.org .

Posted: June 19, 2009