With the news from Harley Davidson last week that they need to find $54 million in cuts to their costs, the debate renewed over just how bad Wisconsin’s taxes are for business. Attention is now focused on combined reporting, the corporate tax increase passed as part of the budget reconciliation bill and the last state budget. Of the $54 million, Harley Davidson is facing $22.5 million in increased taxes as a result of the new combined reporting requirement.
Combined reporting requires corporations to combine income from all subsidiaries regardless of where they are located and lump it together with the corporate entity based in Wisconsin, with some allowance for the amount of actual business conducted in the state. It is supposed to be more “fair” in that it prevents corporations from paying their subsidiaries based out of state for services in order to avoid paying Wisconsin taxes. Never mind that the Department of Revenue already had the power to go after companies that did such transfers with the sole purpose of avoiding Wisconsin taxes.
Liberal special interest groups, such as the Institute for Wisconsin’s Future, might claim it was a matter of fairness, but they saw it as a way of increasing state revenue from the corporate income tax without raising taxes. They claimed it was merely closing a loophole that could be used to fund all sorts of state spending.
That supposed “closing a loophole” raised corporate income taxes $1.2 billion, money that could have been better spent in the private sector creating jobs and retooling for the post-recession economy. That $1.2 billion is how much less competitive Wisconsin businesses are compared to businesses in other states.
At the time combined reporting was passed, business groups warned of the consequences. The Coalition to Save Wisconsin Jobs, a group of manufacturing and service industry companies, prophetically said,
Combined reporting creates a significant disincentive to invest in and grow Wisconsin business because it will inevitably lead to taxing income earned from entities without nexus in this state. Taxing the significantly reduced income of employers will certainly do nothing to “stimulate” the economy; on the contrary it will make Wisconsin less economically attractive than it is at present.
That is the burden Harley Davidson faces today. While Governor Jim Doyle may say combined reporting is not an issue for Harley Davidson, as he did on Friday, but the $22.5 million in combined reporting taxes is hitting their bottom line like a farm combine slices through a corn field.
Wisconsin now faces the burden of doing what it can to prevent another large manufacturer from leaving the state. While Harley Davidson so far wishes to handle this as an internal cost-control issue, will the state find itself creating financial incentives to keep Harley Davidson from leaving? Would it not be easier than riding to the rescue of these companies and their employees to just have a business climate already in place that fosters the economic conditions for growth?
If the goal is tax fairness, as the supporters of combined reporting claim, how is it fair that a company needs to be drowning under the Wisconsin tax burden before they can seek any sort of relief, and then it’s just more exceptions carved out the state tax code?
Aha! The supporters of higher taxes will say. The state tax burden isn’t so bad according to them, and they point to a study released just prior to the close of the legislative session saying Wisconsin’s tax burden is about average, 24th overall.
The problem with the study is that the numbers they are using are from 2006-2007, prior to the current budget in place, and even prior to the state budget fix passed last year, too. It’s from a time when Democrats were only in control of the Governor’s mansion and responsibility for the state’s tax policy was shared between the two parties.
In the 2009-2010 biennium, under complete Democratic control, Wisconsin had one of the largest tax increases in the country (see here for a snapshot on the detrimental budgetary moves of the last two years). Only six other states had a higher percentage increase. That increase includes the new combined reporting tax burden on corporations.
Defenders of the combined reporting requirement, like former Commerce Secretary Dick Leinenkugel, like to point out that Wisconsin is one of 23 states (out of 45 that tax corporate income) that now have a combined reporting requirement. We might not have been on the cutting edge of new taxes, but that hasn’t prevented Wisconsin business from bleeding.
State Representative Leah Vukmir has called for a special session to put an end to the combined reporting requirement so Wisconsin businesses can once again be competitive and thrive. It would certainly beat the fire drill method of helping businesses in the state now.
When the state legislature adjourned with many bills still on the agenda, one of them was recognition of Harley Davidson as the state’s official motorcycle. We’re lucky it didn’t pass, because it might have been a good-bye present to the company as they rolled production out of here.
By James Wigderson
Special Guest Perspective for the MacIver Institute