Legislation & Politics

Letter to members of the House Judiciary Subcommittee on Commercial and Administrative Law opposing H.R. 1956

September 27, 2005

Members of the Judiciary Subcommittee
on Commercial and Administrative Law
U.S. House of Representatives
Washington, DC 20515

Dear Representative:

AFSCME urges that you oppose H.R. 1956 because it restricts states' authority to determine appropriate tax systems for themselves. H.R. 1956 significantly tightens existing federal limits on state taxing authority and creates greater opportunities for aggressive tax avoidance. At a time when states are still struggling to recover from their worst fiscal crisis in decades, we strongly feel that further constraining state authority to establish and operate revenue systems is wrong.

H.R. 1956 further restricts state corporate taxing authority in three ways:

  • First, it expands the federal limits on state taxation in Public Law 86-272 from the sale of goods to the sale of services and intangibles. P.L. 86-272 prohibits states from asserting nexus on corporations that make sales of goods in a state without having a substantial presence in the state. This expansion would expand the opportunities that corporations arguably already abuse in order to avoid state income taxes.

  • Second, it expands the application of P.L. 86-272 to many additional state business taxes besides the corporate income tax. This would impose new restrictions on the business taxes levied in many states that are not currently subject to P.L. 86-272.

  • Third, it narrows states' ability to impose nexus on corporations, by imposing a “physical presence” requirement that goes beyond the current standard. Furthermore, the bill creates additional “safe harbors” of activities that do not constitute physical presence, including the use of nonexclusive contractors or sales agents.

H.R. 1956 further limits states' authority to determine appropriate tax systems at a time when they face historic fiscal challenges, due in part to corporate tax avoidance already being practiced. States are struggling to recover from record budget deficits that total more than $235 billion over four years. And states already face challenges in levying corporate income taxes. The corporate income tax contributed just 6.3 percent of state revenues in 2000 in states with a corporate income tax, compared to 10.2 percent in 1979. The Congressional Research Service reported in 2000 that effective state and local corporate income tax rates fell to 3.83 percent in 1998, down from 6.45 percent 10 years earlier.[1]

Much of the decline in state corporate income taxes is the result of aggressive corporate tax avoidance. The Multistate Tax Commission (MTC) reported last year that states lost between $3 billion and $7 billion due to domestic (interstate) tax sheltering in 2001. States lose even more revenue due to the trickle-down effects of corporate avoidance of federal taxes. Among the techniques corporations employ is the avoidance of nexus in states where profits are earned, resulting in “nowhere” income that is untaxed in any state.[2] The MTC found that the state corporate tax sheltering problem is the result of actions by a minority of corporations. Unfortunately, H.R. 1956 rewards these companies by ratifying current tax shelters and expanding the opportunities to shield income.

For the foregoing reasons, AFSCME opposes H.R. 1956. This legislation will result in additional tax sheltering by a greater number of corporations and a further shift of tax burdens onto state residents. After the severe state budget deficits that states recently have experienced, it would be wrong to impose new restrictions on their authority to create viable, productive tax systems.

 

Sincerely


Charles M. Loveless
Director of Legislation

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