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The Return of the Unitary Tax?

March 7, 2008

Representative Dan Gelber (D-Miami Beach) and Senator Ted Deutch (D-Delray Beach) have filed legislation to “restore fairness to Florida’s corporate tax system,” but don’t be fooled by their spin on this proposed legislation … this is the old unitary tax.  A unitary tax is defined as a taxation system whereby taxes are calculated on a percentage basis of a company's world-wide operations, rather than on the profits made in the area where the taxing authorities are located.  When the unitary tax was first enacted Florida, corporations were told it was a fairer share of state corporate income taxes.  Instead, major multi-state companies left Florida including IBM and Sony.  It was such a bad idea, Florida repealed it in 1984.

Florida allows corporations to divide how they report income.  HB 1237 Relating to Corporate Income Tax and SB 2766 Relating to Corporate Income Tax/Water's Edge Group would establish a “combined reporting” system.  Combined reporting requires a company to combine the income of all of its subsidiary or affiliated companies, and then allocate an appropriate share to Florida.  So why is combined reporting bad?  It discourages investment, is complicated and costly to administer, and in some cases no additional revenues are gained by the state.

It is not the “loophole closer” that some believe.  State revenues from corporate income taxes have grown in non-combined reporting states over the past few years.  Minnesota adopted combined reporting and two years after it was implemented, the Department of Revenue estimated that the actual change in revenue resulting from the adoption of combined reporting was zero. 

Instead of adding $400 million to the state coffers as promoted by the bill sponsors, multi state businesses will have to spend money on costly tax return preparation and audits.

Currently, 17 states have mandatory unitary combined reporting.  Some states have a version of this law including Texas, New York and Michigan.  However, 11 states have rejected combined reporting legislation recently - Arkansas, Connecticut, Iowa, Maryland, Massachusetts, Missouri, New Jersey, New Mexico, North Carolina, Pennsylvania, and Wisconsin.

Let’s hope that history does not repeat itself.  Florida can not afford this bad tax.  IBM took its 10,000 employees from Boca Raton when the unitary tax was first enacted and moved their plant to North Carolina and other states where there was no such tax.  Former Governor Wayne Mixson did not call it the “Urinary Tax” for nothing!

We encourage all AIF members to contact Representative Gelber and Senator Deutch and communicate your opposition to this bad tax policy.