Annette Nellen
Annette Nellen

State Examination of Corporate Taxation

What do recent reports from state tax reform commissions reveal about the future of state taxation of corporations?

June 23, 2011
by Annette Nellen, CPA, Esq.

A given in state taxation is that it will be studied on a regular basis. States often form tax commissions to review and report weaknesses in the system and possible reforms to the governor and legislatures. Reform does not usually follow though. Yet, policymakers, journalists or public interest groups keep some aspects of the recommendations alive through further discussions. Initially lawmakers may ignore any recommendation only to surface at a later date when an issue arises, such as a state's need for additional revenue.

This article looks at reports issued in the past year in four states: Georgia, Maryland, South Carolina and Vermont. The focus here is on recommendations relevant to corporations. For more on state tax reform commissions, see Moving State Tax Systems Into the 21st Century.

Information about the formation and make-up of the commissions is included in Exhibit A.


Purpose: To “examine the tax code of Georgia, review it for fairness and then recommend a new structure that would be as growth-friendly and as job-friendly” as possible.

Corporate recommendations: The commission recommended simplifying business credits, maintaining rate parity with the personal income tax, eliminating most exemptions in the sales tax other than ones claimed on business inputs and adopting the Streamlined Sales and Use Tax Agreement (SSUTA).

For credit reform, the commission called for eliminating all economic development credits in 2012 and all other corporate credits in 2014. In their place, a fund would be created for use by the Department of Economic Development to benefit new and expanding businesses. The Department would be given broad authority to design the rules with award tied to the number of jobs created or amount of capital invested.

Of note
: The commission established seven “Guiding Principles” for use in its work. These include standard principles of good tax policy such as equity, simplicity, efficiency and stability. The final principle is one often overlooked in tax reform, which tends to focus just on the type of tax, the base and rate structure. This final principle: “The system of taxation should include an avenue for resolving tax disputes that is unbiased, transparent, cost-effective for all parties and easily accessible.” (Final report (PDF), page 10.) Recommendations included establishment of an independent tax court.

The final report notes that Georgia’s 30+ tax credits available to corporations and other businesses fail to meet most of the guiding principles set out by the commission. That is, they make the system more complicated, distort behavior and are unfair in that they are not equally available to all taxpayers. Evidence presented also indicated that the credits had little value to new and smaller companies. The final report includes recommendations to improve the design and use of tax credits. For example, if a credit is intended as a job creation incentive, its value to the employer should be separate from its tax liability. Suggestions for achieving that separation were to make the credit refundable or allow it to be sold. The report also recommended that credits have clear objectives and be evaluated as to whether that objective was met.


Purpose: To examine the current business taxation system with special emphasis on consideration of combined reporting with a water’s-edge election, other tax structures such as a gross receipts tax or value-added tax (VAT) and better methods for evaluating the effectiveness of economic development incentives.

Corporate recommendations: The final report offers three recommendations:

  1. Do not implement combined reporting in the 2011 session. Such reporting for unitary businesses can be complex and shift taxes among industries. Some of the tax avoidance issues leading to calls for combined reporting have already been addressed through the holding company add-back rule and the ability of the Comptroller to apply IRC § 482.
  2. Do not change economic development incentives but create a group to ensure that incentives are measurable and cost effective” (page 4 of final report (PDF)).
  3. Support the SSUTA.

Of note: To better understand combined reporting, corporations were required to report particular data to help in determining its revenue effects. These reports are posted to the Commission’s website. This website also has links to a great deal of background data, articles and reports on many aspects of state tax reform that are relevant beyond Maryland.

A minority report from two members representing the public calls for cutting tax expenditures or treating them similar to “appropriated expenditures.” This suggestion also calls for use of cost-benefit analysis and sunset dates for tax expenditures. The minority also recommended adoption of worldwide combined reporting, with water’s edge combined reporting as an alternative recommendation. They noted that such a system would bring greater equity between the taxes on domestic versus multinational firms operating in Maryland.

South Carolina

Purpose: To develop criteria for evaluating the current tax structure and issue a detailed, comprehensive report. Such work was to focus on balancing an effective tax structure while maintaining and strengthening the State’s ability to attract businesses. The Commission was also asked to study and make recommendations on replacement of most of the state taxes with the “Fair Tax” (a national sales tax).

Corporate recommendations: Increase the Bank Corporate Income Tax to be more similar in effect to other businesses’ taxes paid. Combined reporting should replace the current separate reporting structure. If this recommendation is not followed, reforms should be made to the separate reporting system, including to adopt IRC ~§~482 and the economic substance doctrine, disallow deductions for related party REITs, allow for forced combinations when appropriate and apply the throwback rule. Issues noted for separate reporting include the “loophole” for use of Delaware holding companies to reduce South Carolina income and advantages for multinational companies versus smaller businesses.

To address the issue of “illegal tax shelters” and contingency fee tax planning, the commission recommended that Circular 230 be adopted.

Most sales tax exemptions, other than those for business inputs, should be repealed and the base broadened to include specified personal services and digital goods. The changes should be revenue neutral through the reduction of the sales tax rate (from 6% to 5%). The pros and cons of the SSUTA were also noted apparently with the goal of having the legislature consider it further.

Of note: The report points out that the value of the current sales-tax exemptions is higher than sales-tax collections. The “Fair Tax” was not recommended due to lack of data on its effect, but the commission recommended further study.


Purpose: To prepare a “structural analysis” of the tax system and make recommendations to improve and modernize the structure ensuring that it is sustainable, appropriate and equitable.

Corporate recommendations: The majority report includes no specific corporate recommendations. This was due to revenue neutrality goals and testimony that corporations were more interested in other reforms, such as reduction in personal-income tax rates. The recommendation to broaden the sales tax to cover more personal services and goods and to lower the rate would affect corporations. It was also recommended that Vermont work with other states to encourage Congress to enable states to collect from remote vendors. The recommendation to examine tax expenditures including identifying the purpose of each, reporting on the “foregone revenue value” of each and imposing sunset dates to ensure regular review.

The minority report included corporate recommendations to the existing unitary combined reporting system. These changes include adoption of a single sales factor apportionment formula and elimination of the throwback rule. In addition, a lower, flat corporate income tax should be considered. The goal of these reforms is to make the state more attractive to businesses.

Of note: Restructuring of the personal income tax included removing both the standard and itemized deductions and creating a residential credit intended to be more transparent. Only two filing statuses would be used: single and joint.


The tax reform reports summarized here in terms of their corporate focus, had several similarities despite the varying tax structures they analyzed. Common themes include:

  • The need to periodically review a state’s tax system.
  • The importance of equity, simplicity, economic growth and accountability to the design of a tax system.
  • Reducing the number of tax expenditures — special exemptions, exclusions, deductions and credits and implementing accountability measures for those that remain.
  • Interest in a uniform sales-and-use tax system and improving collection of tax on e-commerce.

Missing from the reports was discussion of federalism and Congress’ occasional efforts to limit state taxation, as well as efforts beyond the SSUTA to have more uniform state laws, such as with respect to sourcing and apportionment.

The reports are beneficial beyond the needs of the state each addresses. They provide a wealth of useful information and data for any state considering how its tax system stacks up against principles of good tax policy and in which improvements can be made. Their analysis of tax expenditures and rate structures also has federal relevance. Of course, getting broader buy-in on recommendations for significant changes and enacting them are challenges.

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Annette Nellen, CPA, Esq., is a tax professor and Director of the MST Program at San José State University. Nellen is an active member of the tax sections of the AICPA, ABA and California State Bar. She chairs the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.