CORPORATE TAX POLICY AND THE RIGHT TO KNOW Improving State Tax Policymaking By Enhancing Legislative and Public Access By Professor Richard D. Pomp Alva P. Loiselle Professor of Law School of Law University of Connecticut for The Fiscal Policy Institute 146 State Street Albany, New York 12207 December 1993 CONTENTS Executive Summary i I. Introduction 1 II. The Disclosure of Income Tax Information at the 4 Federal Level: An Historical Perspective A. The Civil War Income Taxes: 1861-1872 5 B. The 1894 Income Tax 7 C. The Tariff Act of 1909 8 D. 1913 - 1923 10 E. The 1924 and 1926 Acts 11 F. The Pink Slip Provisions: 1934 - 1935 14 G. SEC Disclosure: 1933 - Present 20 H. Citizens for Tax Justice and the Use of SEC-Required Disclosure for Tax Policy Analysis 22 I. Summary 24 III. Disclosure at the State Level 26 A. Massachusetts 26 B. West Virginia 28 C. Arkansas 29 D. Wisconsin 31 E. Lessons to Date 32 IV. Evaluating the Case for State-Level Tax Disclosure by Publicly-Traded Corporations 33 A. Firm-Specific Disclosure is Necessary for Informed Tax Policy 33 B. Firm-Specific Disclosure is Essential to Public Understanding of Corporate Tax Issues 38 C. Sunlight is the Best Disinfectant: Disclosure Would Promote Openness and Accountability 39 D. State-Level Disclosure Will Complement SEC- Mandated Disclosure 40 E. Why Not Disclose Firm-Specific Data Anonymously? 41 F. Will Disclosure Violate a Corporation's Right to Privacy? 43 G. Will Disclosure Reveal Proprietary Information? 43 H. Will Disclosure Discourage the Filing of Accurate Tax Returns? 47 I. Will Disclosure Undercut a State's 48 "Business Climate"? J. Conclusion 50 V. Formulating State Disclosure Policy 51 A. Who Should be Covered by Disclosure? 51 B. What Information Should be Disclosed? 53 1. Tax Expenditures 53 2. Normative Provisions 54 C. The Mechanics of Disclosure 57 VI. Conclusion 61 Endnotes 63 CORPORATE TAX POLICY AND THE RIGHT TO KNOW Improving State Tax Policymaking By Enhancing Legislative and Public Access Executive Summary During the 1980's, Citizens for Tax federal aid, unfunded federal mandates, Justice (CTJ), a Washington-based the recession, and overly ambitious think tank, was able to utilize data from state tax reductions. In addition, many annual reports to shareholders and to states adopted a variety of new the Securities and Exchange corporate tax incentives in an effort to Commission (SEC) to document that stimulate their recession-plagued some of the largest, most profitable economies. At the same time, some of corporations in the country were paying those states and others labor under little or nothing in federal income taxes. constitutional or statutory limitations The public outcry that resulted from the on revenue-raising at the local or state reporting of this information was one of levels. the keys to the sweeping changes included in the Tax Reform Act of In light of the states' budget problems, 1986. questions were raised about whether corporations were paying their "fair State-Level Disclosure share" of the cost of public services. And, specifically, the adoption of new CTJ's work cannot be replicated at the corporate tax incentives in the face of state level. The annual reports of looming deficits raised serious publicly-traded corporations contain concerns about whether these information on the aggregate amount of provisions were achieving their state and local income taxes paid, but intended goals. It soon became obvious this information is not broken down that none of these questions could be state-by-state. And, until recently, only answered without more information Wisconsin allowed the public to obtain about the state corporate income taxes information on the amount of state being paid by specific, large businesses income tax paid by specific and the amount of state tax incentives corporations. they were receiving. The effective use of the information Corporations pay over $20 billion disclosed pursuant to the SEC yearly in state corporate income taxes, requirements motivated state legislators but the lack of state disclosure makes it and tax reformers to consider state- impossible to evaluate the extent to level disclosure laws. Their interest was which the corporate tax burden is heightened by the revenue shortfalls allocated fairly or rationally in that state and local governments were relationship to measures of facing as a result of reductions in profitability. In addition, while i businesses receive billions annually in The West Virginia statute has more of state tax incentives it is not known a tax policy orientation. It requires the which corporations receive what types state's Tax Commissioner to publish an of incentives and in what amounts. annual report indicating the name and Hence it is not possible to analyze address of every taxpayer, whether a accurately the effectiveness of the corporation or individual, receiving any billions of dollars being expended one of 12 specific credits, and the annually through state tax incentives. amount, by broad dollar category, of the credit received. The issue of state corporate tax disclosure was raised in 1987 by a staff Support for disclosure legislation in study for New York State's Legislative West Virginia arose after a state Tax Study Commission, and since then government report showed that only a three states (Arkansas, West Virginia, small number of taxpayers benefit from and Massachusetts) have adopted laws the state's so-called supercredit, with providing for some state-level about 50 firms claiming credits in disclosure by corporate name. While excess of $100,000 annually. This Wisconsin has had a disclosure law credit was estimated to cost the state since 1923, it has only recently been $60 million in forgone revenue in FY used for tax policy purposes. In 1991, 1991 when its corporate income tax the Wisconsin Action Coalition used was yielding less than $200 million. the information available under that law The first report under the West Virginia to compile a list of major corporations Law is scheduled to be issued in doing business in the state that had paid December, 1993. only nominal state income taxes. This contributed to legislative adoption, on The most comprehensive of the new two occasions, of a new corporate laws was enacted in 1993 in minimum tax, which, in both cases, was Massachusetts as the result of the vetoed by the Governor. efforts of a state-level tax reform organization, the Tax Equity Alliance In 1991, both Arkansas and West for Massachusetts (TEAM). Originally Virginia adopted statutes providing for put forward as a state ballot question, the disclosure of information on the the new Massachusetts law was written dollar amount of certain specific credits as part of an agreement among TEAM, taken by corporate and individual the business community, and legislative taxpayers. The Arkansas law is a leaders. This statute requires all Freedom of Information Act -type publicly-traded corporations that do statute, and allows interested parties to business in the state, and which already request from the Arkansas Director of publish, in SEC-required reports, their Taxation, by name of taxpayer, the federal income tax liability and their amount of benefits received pursuant to aggregate state income tax liability, to specified business tax incentives and disclose six key items of information any additional incentives of the same related to their Massachusetts taxable type enacted after January 1, 1991. income and tax liability. The information to be disclosed will be ii sufficient to allow for a fair evaluation battle over access to individual returns, of the workings of the state's corporate supporters of disclosure gave up an income tax. The law established similar opportunity to achieve corporate requirements for banks and insurance disclosure directly through the companies. The first public filings provisions of the Internal Revenue under this statute are due at the Code. Massachusetts Secretary of State's office by December 31, 1993. The few times when Congress did focus on the differences between Disclosure at the Federal Level corporations and individuals, it tended to opt for more disclosure in the case of Some observers of these recent corporations. Even today, the fact that developments have seen them as a 1% shareholder can inspect the tax innovative, if not radical. In reality, return of his or her corporation extensive financial information, (although the shareholder cannot including tax information, is already in disclose any information obtained from the public domain because of SEC the inspection), indicates a willingness regulations and generally accepted to recognize less legitimate claims to accounting principles (GAAP). What is privacy in the case of corporations than not fully appreciated, however, is that in the case of individuals. prior to the enactment of the Securities Act of 1933 and the Securities In recent years, the need for public Exchange Act of 1934, corporate tax access to federal corporate income tax returns or key items of tax information returns has been mooted. The SEC has were frequently matters of public essentially preempted the issue by record. mandating the disclosure by publicly- traded corporations of extensive A review of the history of public access financial data including numerous to federal tax returns reveals that the components of tax expense, including issue of corporate tax disclosure was specifically information on investment almost always intertwined with tax credits. questions related to the privacy of individual tax returns. The privacy The Case for State Level Disclosure extended to federal corporate returns generally piggybacked onto the The debate has now shifted to whether treatment of individual returns. The the public should have access to state privacy issue was basically fought--and tax data by name of corporation. This lost--over the issue of whether debate has been fueled by revelations individual returns should be public that large numbers of profitable information.