Breakthrough in state corporate tax reform efforts.

• Position: News & Numbers

A growing number of states are giving serious consideration to a major reform in their corporate income taxes long advocated by state tax experts. A new report from the Center on Budget and Policy Priorities says "2007 could be a breakthrough year in state corporate tax reform efforts." The governors of six states--Iowa, Massachusetts, Michigan, New York, North Carolina, and Pennsylvania--all recommended this year that their states implement this policy, which is known as "combined reporting" New York enacted combined reporting legislation on April 1 as part of the state's budget bill for FY2007-08.

Most large multistate corporations are composed of a "parent" corporation and a number of "subsidiary" corporations owned by the parent. Combined reporting essentially treats the parent and most subsidiaries as one corporation for state income tax purposes. Their nationwide profits are combined--that is, added together--and the state then taxes a share of that combined income. The share is calculated by a formula that takes into account the corporate group's level of activity in the state as compared to its activity in other states.

Sixteen states--slightly more than one third of the states with corporate income taxes--have mandated and successfully used combined reporting. (See map.) Until recently, however, that group had not expanded at all--not even after the U.S. Supreme Court ruled in 1983 that combined reporting was a fair and constitutional method of taxing...