States Worry About Federal Rules for Taxing Business

WASHINGTON – States and cities could eventually lose $3 billion a year if Congress prohibits them from taxing companies that earn income in their states but do business without local employees or offices.

The House expects to debate a bill Tuesday mandating that businesses have at least one employee in a state for 21 days, or have leased or bought property, to be subject to that state's business taxes.

That includes taxes on business income, profits, receipts and other figures, but not sales taxes paid by consumers. It also applies that rule to companies selling services, not just goods.

Its supporters say companies need the federal government to intervene and make sense of confusing state laws, which can subject out-of-state businesses to taxes even when a company's employees or goods just pass through a state for a few days.

The Congressional Budget Office estimated that state and local governments stand to immediately lose $1 billion under the changes. The budget analysts said states can expect to lose $3 billion each year beginning next decade as companies reorganize to take advantage of the rules.

The CBO also said certain industries, including media and banking, can avoid taxation even if they have a physical presence in a state.

State and local governments have reacted with alarm at the size of the potential losses.

"We call this a federal corporate tax cut using state tax dollars," said David Quam, director of federal relations for the National Governors Association. The group's own survey of tax administrators put the eventual losses at more than $6 billion a year.

Rep. Doc Hastings, R-Wash., who said he typically supports GOP tax revisions, said he has "some angst" about the bill's effect on his state. Washington could lose hundreds of millions of dollars, "a little bit of a problem," he said.

The CBO estimated that all states would lose some money, but that 10 states would bear 70 percent of the losses. They are California, Florida, Illinois, Michigan, New Jersey, New York, Pennsylvania, Tennessee, Texas and Washington.

Rep. William Delahunt, D-Mass., said state and local governments stand to lose so much money because businesses reorganizations would create "nowhere money" that did not get taxed in any state or local jurisdiction.

Several Democrats asked GOP leaders to consider amending the bill to block the law from going into effect unless a state can attest that its education, health and homeland security programs would not be undermined.

Businesses pressed lawmakers to support the bill and create a uniform standard across the states.

John Castellani, president of the Business Roundtable, sent House lawmakers a letter on the eve of their expected vote, telling them that the result would be a more stable business and legal climate.

"In doing so, this legislation will create new jobs, increase business investment and foster economic growth," he wrote. The Business Roundtable represents the chief executive officers of more than 160 corporations.