Thursday, June 17, 2010

NC Lege wants to incentivize big-business tax cheats

The NC legislature is considering a change in the state's tax system that is projected to cost the state $100 million in business tax payments that are legitimately owed.
The state Senate and the business lobby want to take away a big stick that the state's tax collector says it needs to punish big businesses that dodge their taxes.

The issue is up for debate in budget negotiations under way between the state House and Senate. The Senate's version includes a provision that would prevent the N.C. Department of Revenue from assessing a penalty on businesses it thinks are hiding income. The provision is not included in the House's version.

N.C. Department of Revenue Secretary Ken Lay, who is under pressure to maximize the state's collections in the aftermath of a deep recession, says he needs the ability to assess penalties to force companies to be honest. Without the penalties, the revenue department thinks it would miss $100 million in taxes it would otherwise collect. The state faces an $800 million revenue shortfall.
The current policy penalizes substantial under-reporting of business income--it only applies to businesses that under-report their income by 25 percent or more. The policy provides an incentive, albeit an incomplete one, for multi-state businesses to report their NC income. If a company is found to under-report, it must pay the tax that is legitimately owed and a penalty.

The new policy would remove that penalty. In so doing, multi-state companies would have strong incentives to hide their NC income in sham out-of-state operations. If the NC tax authorities fail to detect these maneuvers, the companies escape their tax obligations. If the authorities do uncover the shenanigans, the companies would only be on the hook for the amount that was originally owed plus interest.

The results are easily predicted. More companies will attempt to hide income, and enforcement will become both more costly and less effective. Tax cheats get a tremendous break, leaving the rest of us to either pay more or make due with fewer state services.

The NewsObserver article states that
Supporters of the idea say the revenue department is overstepping its authority and unfairly punishing business. The penalties punish a well-intentioned company that had no way of knowing the department would disagree with its tax return years later, they say.

The revenue department is hardly "overstepping its authority" by investigating tax returns and following state policies in assessing penalties.

It also seems unlikely that "a well-intentioned company" would be punished, as the current penalty doesn't apply unless there is substantial under-reporting.

As for not knowing, the companies have the same responsibility that the rest of us do to follow the law and compute their taxes correctly.

North Carolina faces enough problems with its antiquated tax system and with anticipated budget shortfalls over the next few years. The legislature shouldn't compound that problems by encouraging multi-state businesses to hide their incomes.