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"Reform the State’s corporate and bank franchise taxes to better reflect how businesses operate in the 21st century economy and improve business tax incentives so they achieve their economic and social goals at an appropriate cost to the state."
How have business operations changed in the 21st century to warrant this recommendation? One (legal) way some businesses escape the federal government’s tax net is to shift their legal address abroad. “More than 40 U.S. companies have reincorporated in tax havens, a strategy known as inversion, 11 of them since 2012,” according to Bloomberg Businessweek’s Zachary R. Mider (“Big Enough to Drive a Government Contract Through”, July 14-July 20, 2014, available in Legislative Library).
Ingersoll-Rand, a leading energy efficient air conditioner manufacturer, cut its tax bill by changing to a Bermuda address. Ingersoll-Rand’s move was preceded by Tyco International and Accenture, according to Mider, who also noted that “a company that avoids domestic taxes by shifting its address abroad can still be eligible for federal contracts if it has ‘substantial business’ in its new home—thus nominally demonstrating that its move wasn’t solely for tax reasons.” (Mider’s main point was whether these companies should be allowed to bid on government contracts.)
But business strategies aren’t the only forces reducing tax flows. In some cases, reduced tax flows may be the natural outcome of technological improvements. For example, in a recent State Tax Notes article, Texas Deputy Comptroller Billy Hamilton cited sources attributing the drop in motor fuel taxes to the increase in fuel-efficient cars and the fact that people are driving less. (“A Tax Designed to Fail: How Do You Solve a Problem Like the Gas Tax?,” March 3, 2014, available in Legislative Library).
State motor fuel taxes generate about $40 billion a year, and most of the revenue pays for transportation-related improvements. “That’s a big hole to fill,” Hamilton stated. So, what are our options? Get people to switch back to gas-guzzlers?
No one appears to be calling for that, but other options have political pitfalls. As Hamilton notes, “Unlike other major taxes that are levied on a percentage basis, fuel taxes are usually collected as a fixed number of cents on each gallon. They don’t grow with inflation or keep pace with increasing highway costs.” States could increase tax rates, and eight did so in 2013. Another option is shifting the basis of the tax from fuel consumption to the number of miles a vehicle travels, an option that poses political and technical challenges.
