Tax Analysts Blog

Why Study Combined Reporting?

Posted on Apr 13, 2016

"Yeah, we're going to study that combined reporting thing," said an Indiana legislator when asked whether he supported combined reporting. In his defense, he's not a tax guy. Perhaps the decision to study combined reporting in Indiana is a good thing. Gov. Mike Pence (R) recently signed legislation directing the Legislative Services Agency to study and report on the feasibility of adopting combined reporting.

Some of you will say that this is a smoke screen and that when the government orders something studied, it simply wants to avoid an issue. There may be some truth to that. It's not as if we don't know a lot about combined reporting. The Center on Budget and Policy Priorities has written a lot about it. The Council On State Taxation has written a lot about it. Other think tanks and academics have written about it. What could Indiana possibly learn that we don't already know? Weirdly, the decision to study combined reporting was approved unanimously in both houses -- decidedly conservative houses.

But as the quote above illustrates, most lawmakers don't really know much about combined reporting. Heck, most don't know much about the fundamentals of tax policy. So maybe some studying is in order. In this case, the bill directs the agency to evaluate the administrative costs of implementing combined reporting; estimate its fiscal impact; consider the approaches taken by other states; review other studies and reports; and review issues related to transfer pricing. Those are all good things to know.

But in the end, the legislature will discover what most of us already know. Some very smart people, including some at the CBPP and Richard Pomp, think combined reporting is critical in successfully levying a corporate income tax. And other smart people, including the folks at COST, think the benefits of combined reporting are exaggerated and that there are better ways of combating planning abuse.

The question is whether studying combined reporting will lead to its adoption in Indiana. I'm in the odd position of opposing the state corporate income tax and favoring combined reporting. I have long believed that if you're going to tax corporate income, you need combined reporting. The trend in recent years has been to adopt combined reporting. I think 24 states require it. But opponents have become adept at arguing against it for economic development reasons, saying it's bad for business. That's why it's unlikely to ever pass in Indiana, regardless of how long or closely it is studied.

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