‘Worldwide Combined Reporting’ dropped by the Senate, only the House left

Last week, I wrote about “worldwide combined reporting,” an element of both the House and Senate budgets. It’s a bit of a technical measure, but this shouldn’t obscure just what a bad idea it is.

Combined reporting requires the filing of a unified tax return accounting for the aggregate income of a corporate parent and all subsidiary corporations regardless of their individual nexus with the state. Minnesota currently mandates combined reporting, but the unitary reporting requirement only applies to the U.S.-based corporate relations of a firm with a Minnesota corporate income tax filing requirement.

Under “worldwide combined reporting,” the aggregate income of every subsidiary or parent firm of any corporation with a Minnesota filing requirement would have to be included on the state tax return regardless of global location. The measure is estimated to bring in an extra $23 to $103 million annually in additional revenue.

This will impose a heavy burden. To comply, foreign income would have to be tracked in the local currency, converted to the parent corporation’s home currency, then converted into U.S. dollars for reporting to the state. On top of that, international corporate affiliates would need to engage in a complex, time-consuming process of adjudicating what business activity may have qualified as a sale into Minnesota. For multinational corporations with extensive overseas operations, this process would be a significant burden.

And it would be a burden imposed by no other jurisdiction: No other state or country mandates all-industry worldwide combined reporting. Even the Organisation for Economic Co-operation and Development, when they were looking for a solution to international profit shifting, rejected worldwide combined reporting. Once again, Minnesota is seeking to be a pioneer in bad fiscal policy.

The problems don’t end there.

As the Tax Foundation’s Jared Walczak explains, the estimates for extra revenue are taken from a 2019 study by the Institute for Taxation and Economic Policy (ITEP) which got its numbers wrong. They estimated that U.S. multinationals earn $235 billion in foreign profits, allocated this to the states based on their share of national gross domestic product, and then applied the state’s top marginal corporate income tax rate to that amount.

But ITEP forgets — or ignores — that corporate income is apportioned for tax purposes. When a company does business in multiple jurisdictions, state governments determine what share of its activity is properly associated with them and only tax that portion of the company’s profits. There are three traditional apportionment factors — sales, payroll, and property — and Minnesota uses the sales factor for “single sales factor apportionment.” Essentially, if 10 percent of a company’s gross sales are in Minnesota, then our state can tax 10 percent of that company’s profits (% of Total profits taxable = Sales apportioned to MN / Total sales x 100).

To show how ITEP’s ignorance of this is fatal to its analysis, Walczak gives the example of “a parent company with two subsidiaries [which] both have $1 billion a year in gross sales.” One “sells exclusively in U.S. markets, and 10 percent of those sales are in Minnesota. The second sells exclusively in Europe, meaning it has no sales in Minnesota.” Under current law, Minnesota can tax 10 percent of its profits ($100 million / $1 billion * 100). With worldwide combined reporting, however, we double the double the denominator and halve the sum ($100 million / $2 billion * 100) so that just 5 percent of its profits can be taxed by the state government. The revenue effect is neutral. 

It isn’t clear why the state government isn’t generating its own estimates rather than relying on ITEP’s amateurish output. But perhaps that isn’t the point. I’ve long noted the strange new tendency among left wingers to levy taxes to punish, not to raise revenue. House Tax Committee chair, Aisha Gomez (DFL), argues that “Whether worldwide combined reporting raised $1 or $1 billion dollars, it is the right thing to do.”

Even ITEP’s basic blunder isn’t the only problem with the proposal. It would bring worldwide losses as well as profits into a combined filing group’s calculation so that a recession in other parts of the world could cause a significant hit to Minnesota’s corporate tax revenues. It allows no credit for tax already paid to a foreign government on the income that would be reported and taxed again in Minnesota, enabling double taxation. 

It would be polite to call worldwide combined reporting a harebrained idea. The Senate finally saw sense and dropped it over the weekend. Now we need the House to follow suit.