To the water's edge: repeal of the worldwide unitary tax.

• Author: Kleeschulte, Chuck
• Position: Includes related article - Industry Overview

Alaska has jumped in with everyone else and changed its corporate tax law. The state's lawmakers hope Alaska will clean up financially, rather than take a bath.

Mention corporate tax law and most people's eyes begin glazing over -- immediately. So why did legislators in the first year of a legislative session perk up and with uncharacteristic speed approve a major change shifting Alaska's corporate tax law -- for everyone except oil and gas companies -- to the use of the so-called "water's edge" method of taxation from Alaska's current method of "worldwide combined" tax reporting?

There is no one answer. A constellation of motives and events, the desires to attract foreign investment and please big business, fears over future court decisions, the revenue surplus caused by the Persian Gulf war and the political changes prompted by the new administration of Gov. Walter Hickel all aligned to prompt lawmakers not only to run to the water's edge, but also to jump in, getting both feet wet.

The question for the future is whether the change will act as a tide, washing new international investment dollars onto Alaska's shore, or whether the proponents of "water's edge" taxation will be proven all wet. The state ultimately could take a mini-revenue bath from the switch if the change does not generate new economic investment and thus offset lost revenues.

For the moment, there is no question that supporters of the tax change far outnumber the skeptics. Says Gov. Hickel, whose administration strongly backed and lobbied for the switch, "Repealing (the unitary tax) sends a signal to the business community that we want to provide a good atmosphere for business and industry."

Adds Commissioner of Commerce and Economic Development Glenn Olds, "This administration has clearly stated its intent to promote economic diversification as a primary objective to compensate for pending revenue declines. Amending the unitary tax demonstrates to the international business community that the legislature is willing to work cooperatively with the administration to reduce disincentives for Alaskan investments."

Scott Hawkins, president of the Anchorage Economic Development Corp., says Alaska had little choice but to pass the tax change. "The international business community saw the tax as very onerous. Once Alaska became the last state in the nation to use the worldwide taxing method, we just had to change," he explains.

Rep. Kay Brown (D-Anchorage) was one of the co-sponsors for the switch. She says, "The state clearly will get a benefit from the change. The new method should increase economic development and investment and help remove the perception, which was real whether justified or not, that Alaska wasn't a good place for international investment."

Changing Horses. Almost all states -- 45 of them and the District of Columbia -- use some form of the unitary tax concept to collect corporate revenues. Under a unitary tax, the total income of a corporation, or of an affiliated group of corporations engaged in a related business, is divided up among the states based on the portion of total payroll, property and sales that is attributable or is conducted in each state.

So if a big multinational...