Tax code needs loophole reform
3:08 PM 7/06/03

The state Legislature made a mistake when it passed only half of a reform plan for corporate income taxes. It passed the half that gives corporations a tax break they deserve, but it didn't close a loophole that corporations don't deserve. Lawmakers ought to correct the error by passing the other half of the reform.

As part of the state budget, the Legislature simplified the way Wisconsin taxes corporations that do business in multiple states. Multi-state corporations pose a problem for state tax collectors: How much of a multi-state corporation's income is subject to tax by any given state? Wisconsin has taxed multi-state corporations according to a three-part formula based on in-state sales, property and employment. The Legislature's simplification cut that formula down to a single factor - in-state sales.

Corporations like the single-factor change because it will cut their taxes by a collective $45 million a year. But it also makes sense because the past formula taxed job creation, an unwise thing for a state to do to its economy.

The change has been sent with the rest of the budget to the governor, who supports it.

But with the single-factor change about to take effect, it's time to consider the change the Legislature failed to pass to complete the reform. Currently, state law allows a corporation to set up a subsidiary in a no-tax or low-tax state, transfer income to the subsidiary, and thus escape Wisconsin income taxes. Large banks commonly use the loophole to place income-earning securities in an out-of-state subsidiary.

The change the Legislature should have passed would require that all companies with common ownership submit a combined return. That would close the loophole.

Legislation requiring combined reporting of corporate income faces an uphill battle. Neither Doyle nor the majority of lawmakers favor combined reporting. They ought to change their minds.

The law now endorses a corporate scheme to evade state taxes. That's unfair to individual taxpayers and corporations that pay their