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“Should a locally-owned hardware store be taxed more than a branch of a national retailer?” asked DC Fiscal Policy Institute’s Jenny Reed and Elissa Silverman in a January column in Hill Rag. “Of course the answer is no. Yet right now, national retailers and other corporations often have a distinct tax advantage over local DC businesses.”
Some cuts to safety net services could be staved off if the District cracked down on tax avoidance by multistate corporations. Reed and Silverman noted, “Right now, corporations like CVS and Starbucks are taking advantage of weakness in our tax system by shifting profits they make in DC to other states that have lower – or no – business taxes. The result? They avoid paying their fair share of DC taxes while local businesses and residents pick up the slack in tax revenue.”
“[M]ost large, multistate corporations are composed of a ‘parent’ corporation and a number of ‘subsidiary’ corporations owned by the parent. Some major retailers shift profits earned by subsidiaries to reduce their taxes. For example, Toys R Us has its corporate logo registered in Delaware. Each store pays a royalty to this Delaware subsidiary, which takes profits earned across the country and moves them to Delaware, which just happens to not have a corporate income tax.”
With the implementation of combined reporting, this corporate tax loophole would be closed, providing the District with an additional $23 million a year in tax revenues. Ed Lazere, executive director of DCFPI, said that under combined reporting “every corporation has to file their income taxes as one entity and not [as] a bunch of smaller entities [which shift] their profits around.”
Ward 2 Councilmember Jack Evans, who chairs the Committee on Finance and Revenue, said of combined reporting, “I don’t see any reason why we shouldn’t do it.” Chief Financial Officer Natwar Gandhi said, “This legislation is a fair and equitable revenue source for the District… It is being adopted by many states.”
Despite these strong statements, as well as last year’s Council approval of the legislation, combined reporting has not been implemented. “The real question is who is going to take the lead?” asked Lazere. “Somebody has to be the grown up here. Either the mayor, the Council or the CFO… You can’t keep waiting for somebody else to do it.”
“When Mayor Gray sat down to look at how much revenue the city was going to collect versus… the cost of maintaining services, he found a gap of over $300 million, and that has to be resolved by April 1st. The question is how much will he cut services and how much will he raise taxes to get to a balanced budget?… I think the pressure should be on the mayor to preserve services that keep the city stable and keep families stable. And certainly we should be getting revenue from large corporations that owe it to the District, that are here making profits.”