Tilting at Walmart

It's a familiar "small government" prescription for driving up revenues: Lower taxes, but increase the tax base.
But this time, it's not a Republican, or even a libertarian, beating that drum. New Mexico Sen. Peter Wirth, D-Santa Fe, is the somewhat unlikely author of a bill to lower the state corporate tax rate from 7.6 percent to 7 percent.

The catch? Wal-Mart Stores Inc. and other multistate corporations would actually have to pay it.

The bill, which Wirth plans to introduce in January's legislative session, represents the eighth iteration of one he has carried each year since becoming a state legislator in 2005. The goal is to close a loophole that allows multistate corporations to shelter income earned in New Mexico by transferring it to states with lower or nonexistent corporate taxes. Wirth estimates the proposal could net the state an extra $50-$100 million per year in corporate tax revenue—and make big-box stores, such as the new south-side Super Walmart, earn their keep.

In previous years, Wirth's bill never made it out of committee. But the latest version's across-the-aisle appeal isn't the only reason Wirth—who compares himself to Don Quixote for his dedication to this crusade - believes its time has finally come. The October opening of the city's second Walmart location, combined with the state's budget woes and local and national Occupy movements, may signal a sea change in the perception of corporations and the need for reform.

Until Wirth's bill passes, New Mexico will remain a holdout among the western states that collect corporate taxes (some, such as Nevada, don't collect them at all). Every other state west of the Rockies mandates that multistate corporations use combined tax reporting, in which corporations pay tax on a share of their nationwide income that's based on their business in that state, thus preventing them from sheltering it in no-tax states. New Mexico has combined reporting, but allows corporations to choose separate reporting instead, in effect letting them pocket New Mexico's share of their income.

Combined reporting is cited in numerous nonpartisan policy papers as the most effective way to remove such loopholes.

Next year's bill is sure to inspire a certain migration that happens every time state legislators mull this type of legislation. Lawyers conveyed in private corporate jets will descend on Santa Fe Municipal Airport and make the same argument they always make: Combined reporting will drive multistate corporations out of New Mexico.

"We've got a tax code full of loopholes, exemptions and deductions, and it's not fair…I think that's what people are screaming about," Wirth says, "for good reason."

But according to Michael Mazerov, a senior fellow with the Center on Budget and Policy Priorities' State Fiscal Project who has studied New Mexico's corporate tax in detail, 71 of the 78 biggest multistate employers here also operate in states with combined reporting. In fact, a 2009 paper published in The Marquette Law Review found that mandating combined reporting had no effect on the business climate of states that took the leap. Other factors—including the quality of a state's education—play a bigger role in a company's decision to expand into a state, the report found.

No multistate corporation has so far left a state when it implemented combined reporting—making that supposed sticking point something of a red herring. At issue, though, is whether $50-$100 million in estimated tax income is a realistic figure. In its report on last year's version of the bill, the New Mexico Legislative Finance Committee wrote that the state would see a revenue increase if it mandated combined reporting, but only a temporary one. The report states that the revenue jump would decline to zero within four years as corporations adjusted to avoid the new tax system's impact.

Unfortunately, other states' results don't provide a good point of comparison to help judge whether the LFC's concerns are accurate. Todd Lard, general counsel for the Council on State Taxation, a trade group that represents 600 multistate corporations, says states can't count on a revenue boost from mandating combined reporting. Instead, he argues, they could actually lose money—even without reducing the corporate tax rate. If a corporation's entity in another state loses money one year, including that loss in tax calculations would reduce, rather than boost, the corporation's contribution to New Mexico, Lard explains.

"It's pretty much a numbers game," he says. "You can't really say with certainty [state revenue] is going to always increase—it's just a different filing methodology."

Mazerov says switching from separate to combined reporting can indeed change a company's bottom line in either direction, but that New Mexico is a special case because corporations can currently choose whichever method most benefits them.

"If there's a corporation…that's going to pay less income tax in New Mexico under combined reporting—that's precisely the kind of company that's already going to elect to file on a combined reporting basis in New Mexico," Mazerov says.

Wirth acknowledges there's an element of uncertainty in terms of how the legislation would affect the state's bottom line. But he feels the time is right to correct a fundamental inequity in the current tax code: Since local corporations don't have the option to transfer revenues out of state, New Mexico's corporate tax burden falls disproportionately on them.

As the issue gains traction, progressive political action group MoveOn.org is also pitching in, making mandatory combined reporting its No. 1 legislative priority for next year, MoveOn's Santa Fe coordinator Steven Mayes says. Wirth says the current national dialogue about big business' unfair advantages over the 99 percent shows that it is finally time to "build fairness into the tax code."

"We've got a tax code full of loopholes, exemptions and deductions, and it's not fair…I think that's what people are screaming about," Wirth says, "for good reason."

Santa Fe Reporter