One of the proposals some states are pursuing to raise revenue and close perceived loopholes is to require combined reporting for businesses. California has used combined reporting for years.

In his 1/15/08 state-of-the-state address, Iowa Governor Culver proposed combined reporting for corporations. He observes that it would "level the playing field for Iowa small businesses" and "close a tax loophole [that allows] multi-billion dollar corporations that do tens of millions of dollars of business in Iowa avoid paying Iowa income taxes."

In the past few months, at least 3 reports on corporate tax reform have been issued:

1. Congressional Research Service (CRS), Corporate Tax Reform: Issues for Congress (10/31/07), 39 pages
This report focuses on calls for lowering the corporate income tax rate, which some label as the 2nd highest rate (combined federal and state) among industrialized countries. It also analyzes Congressman Rangel's "mother of all reforms" (H.R. 3970) which proposes to broaden the corporate base and lower the tax rate to 30.5%.

2. U.S. Department of Treasury, Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century (12/20/07), 121 pages.
This report provides some background on U.S. business taxation and compares it to other countries. It then lays out three possibiltiies for reform: (a) a business activity tax (BAT) which is a type of consumption tax, (b) a broadened income tax base and a lower tax rate including contrasting a lower rate with faster asset writeoffs and moving to a territorial system, and (c) reforming various aspects of the current system such as its preference for debt over equity.

See:

On August 9, 2007, President Bush noted that he'd be ok with reducing corporate income taxes and simplifying the tax law. On that same day, he signed H.R. 2272 - America COMPETES Act and called for Congress to finish the work and make the R&D tax credit permanent.

He is not alone in this tendency to call for simplification and lower rates, while also calling for new tax breaks. In his remarks about corporate tax rates he observed that "it's much easier to get something in the code than get it out of the code." A very true statement!

http://www.whitehouse.gov/news/releases/2007/08/20070809-1.html

http://www.whitehouse.gov/news/releases/2007/08/20070809-6.html

So, how do we simplify when we also want to use the tax law to solve all kinds of problems from health insurance to encouraging innovation?

Comments?

This post was originally published at http://21stcenturytaxation.blogspot.com.

The Treasury Dept released a report on 7/23/07 on Business Taxation and Global Competitiveness. It precedes a conference they are hosting on 7/26. The report notes several areas in our current income tax that distorts business behavior, increases costs to comply with the system and inefficiently allocates capital.A few interesting points:

• Removal of special provisions would allow the top corporate rate of 35% to be lowered to 27% and still raise the same amount of revenue.
• Businesses spent about $40 billion in 2004 to comply with the federal tax laws.
• Analysis of business tax rules cannot just look at corporate provisions because in the past 30 years, the number of sole proprietorships, partnerships and S corporations has grown.

I think it is great that Treasury is raising these issues. There are many ways to improve the federal income tax system (as well as the California one) to remove complexity, make taxes less important in business decisions, increase equity, and reduce administrative and compliance costs.For example, many, if not all preferences, such as the manufacturing deduction (Section 199), should be removed and replaced with a lower tax rate.For more information on the Treasury report and conference:http://www.treasury.gov/news/index1.html This post was originally published at http://21stcenturytaxation.blogspot.com.