Bad for business? Experts, industry insiders say part of Bentley tax plan will hurt job creation

This week, the Alabama Legislature approved the centerpiece of the Made in Alabama Job Incentive Package, which the Department of Commerce, Gov. Robert Bentley and the state’s economic developers hope will attract new companies and expansions of existing industry in Alabama.

But lawmakers will soon debate another package of bills that some say could dampen the positive impact of the newly-approved pay-as-you-go incentive program.

Bentley’s proposed $541 million tax increase, particularly House Bill 142, has some legal experts and industry representatives on edge.

HB 142 calls for a repeal of a 2001 statute that prohibits mandatory unitary combined reporting (MUCR), instituting a combined reporting system that legal experts say will represent a radical shift in Alabama’s corporate tax code.

Currently, Alabama’s corporate tax code operates under a “separate entity reporting” system, similar to its Southeastern competitors. This means corporations who have operations in Alabama but are headquartered in other states or countries only pay Alabama taxes on their Alabama operations.

Bentley argues this creates a loophole for large companies doing business in the state allowing them to pay zero income tax to the state.
Bruce Ely, Alabama counsel for Washington D.C.-based Council on State Taxation and co-chair of Bradley Arant Boult Cummings’ state and local tax practice group, recently co-authored a comment letter on the bill, outlining some potential problems.

Those potential pitfalls include MUCR’s “unpredictable and uncertain” effects on the state’s tax revenues as well as the bill’s granting of “broad authority” to the Alabama Department of Revenue.

“Even though the theory sounds good, in practical effect, it is an awful way to run a railroad,” Ely said during an interview with the BBJ. “It will drive business down, it will dampen our economy, and more importantly, it will kill our industrial recruiting efforts.”

Companies on hold

Ely and others have said companies already in Alabama and those looking at the state for potential sites are in a holding pattern until HB 142 is resolved.

“They’re watching the other bills, the ones where the governor wants to raise new revenue,” said Rick Davis, vice president of economic development at the Birmingham Business Alliance of companies who are still on the outside looking in. “There’s a shortfall in the budget, so the governor has asked for a package of bills to be passed raise revenue, so people are watching those bills too.”

Ely said he knows of at least one existing industry that is holding off on an expansion because of the bill.

“We’ve got a client in east Alabama that was planning to expand their operations over there and basically double their capacity,” Ely said. “They called and said ‘We’ve put everything on hold until this bill is resolved. We’re not going to expand anymore in this state until we know that this bill is dead.’”

Bentley told the BBJ in an interview this week the overall tax increase would not hurt industrial recruitment and that the business community was supportive of the initiative, which could help close a $700 million shortfall in the general fund budget.

“My tax proposals will not hamper or keep companies from coming to Alabama,” Bentley said. “This is not going to hurt recruitment of industry to this state…I don’t see any opposition out there from businesses. The only businesses that would be in opposition to it are those not paying their taxes.”

Bentley said Alabama will retain its leverage as one of the lowest taxed states in the country, even with the change to the combined reporting system.

Dennis Donovan, a site selection consultant for WDG Consulting out of New Jersey, called the Made in Alabama Incentive Package a “major step in the right direction” but said combined reporting could hurt Alabama’s recruiting, depending on the company.

“It depends on how much investment they have in Alabama, but it could dissuade some companies from expanding in the state, no question,” Donovan said.
HB 142 is just one component of the $541 million tax hike and is estimated by the Department of Revenue to contribute around $20 million to that number.

“I’ve got one client alone who reports this will cost them $20 million a year, if they stay here,” Ely said. “They may not stay in Alabama if this bill is enacted…These companies are either going to stop expanding here, or their not going to come to this state or they’re going to move operations out of this state, and that’s what we believe will happen if this bill is enacted. We’re going to lose jobs, we’re going to lose companies and we’re going to lose industrial prospects.”

Ely said he estimates the actual annual revenue that will be raised from combined reporting would be around $200 million, but he was quick to add that the pie could quickly begin to shrink if companies stop doing business in the state or expand their operations in another state or country.

If it did raise $200 million annually, that would put the total tax hike at $700 million, which is the current gap in the budget.

Too much overreach

Ely said the Alabama legislature has rejected similar MUCR bills four times in the past, even renewing a statute in 2001 that prohibits combined reporting.

Right now, the closest state to Alabama that has a MUCR system is West Virginia. None of the state’s Southeastern competitors have combined reporting, and Ely said there is a reason for this.

The Business Council of Alabama has partnered with a coalition of business and trade associations that represent a wide range of business classifications in Alabama to oppose HB 142. The Business Associations’ Tax Coalition believes the bill is overreaching and will hurt industries already in Alabama.

“HB 142 will have a negative impact on future job development, specifically on our existing industries while broadening the Department of Revenue’s authority that is detrimental to both the taxmaker and taxpayer in Alabama,” said William Canary, BCA president & CEO in a statement to the BBJ.

Ely and Canary said the bill’s language gives the Department of Revenue and its Commissioner of Revenue unprecedented overreach and discretion as to which companies are labeled unitary or separate entities.

They said the commissioner will also have the discretion to label individual countries, where affiliates of Alabama companies do business as “safe havens.”

“A tax haven can be any country that has a low tax rate and lacks transparency, whatever that means,” Ely said. “The discretion is so broad. That is what is so frightening about the bill. I have not seen another bill like this, and I study all 50 states. Nor has COST seen a bill like this that has so many provisions in there that gives the Department of Revenue such broad discretion.”

A solution already in place

Ely said an alternative solution to combined reporting is already in place in Alabama.

He said if the state were to enforce its existing “transfer pricing” law, Alabama could raise more than the $20 million per year estimated to be generated by the combined reporting system.

“If the Multistate Tax Commission states go after companies using their transfer pricing power, which Alabama has, then Alabama and every other state should make at least $25 million a year annually, conservatively, if they just enforce their transfer pricing rules,” Ely said of revenue estimates provided by Joe Garrett, who chairs the transfer pricing task force of the Multistate Tax Commission. “They already have the weapons in their arsenal. Just use them.”

Bentley contends HB 142 simply closes loopholes for companies that should be paying taxes on income in Alabama.

“That means they must report where they get their money, what their deductions are and what state their deductions are coming from,” Bentley said. “All it is is a transparency bill.”