CP - States 2 - Michigan 7 2023 BFHGR

STATES CP 2
NEGATIVE
Funding – Corporate Income Tax
Corporate Income Tax---1NC
The fifty states and all relevant sub-national actors should
implement a Global Intangible Low-Taxed Income regime
institute tax reforms to curb evasion
Taxing GILTI generates billions---state uniformity prevents evasion
Shanske 21 [Darien Shanske; Ph.D. from UC Berkeley in Rhetoric, clerk for Judge Pierre N. Leval of the United States Court of Appeals for the Second Circuit; 2021; “HOW THE STATES CAN TAX SHIFTED CORPORATE PROFITS: AN APPLICATION OF STRATEGIC CONFORMITY”; https://southerncalifornialawreview.com/wp-content/uploads/2021/08/Shanske.pdf]
Improving the taxation of the profits of multinational corporations—the topic of this Article—represents a reform that would be efficient, progressive and relatively straightforward to administer. Not only would such a reform thus represent good tax policy, but it would also raise significant revenue. And, if substantial revenue, efficiency, progressivity and administrability are not sufficiently motivating, then I will also add that it would be particularly appropriate to make these changes during the pandemic so as to raise revenue from those best able to pay during the current crisis. To be sure, the argument that states can and should tax multinational corporations (“MNCs”) more has the whiff of paradox. After all, there is general consensus that no nation-state is currently taxing MNCs very effectively and, further, that subnational governments are in an even worse position to do so. This is because MNCs can exploit the mobility of capital even more easily between parts of the same country. Nevertheless, I will argue that the American states find themselves in a particularly strong position to do better at taxing MNCs and this is in part precisely because of the missteps made at the federal level. I will briefly explain. The federal tax law passed in December 2017, known as the Tax Cuts and Jobs Act (“TCJA”), includes a number of new antiabuse rules meant to combat income stripping. Income stripping occurs when a profitable corporation engages in tax planning techniques (more on these shortly) so that profits that are taxed in a relatively high-tax jurisdiction, like the United States, are formally earned in a low or no-tax jurisdiction. One important new antiabuse rule is called the Global Intangible Low-Taxed Income (or “GILTI”) regime. The essence of how the GILTI rules work is by identifying foreign assets that are unusually profitable by means of a formula and then subjecting those excess profits to U.S. tax on the theory that they were not really earned abroad, but shifted out of the United States. The size of the income shifting problem is in dispute, but there is broad consensus that it is a large problem and one that is not going to be much improved by the new federal laws meant to combat it.5 Current respected estimates of the amount of income shifted out of the United States to low tax jurisdictions are about $300 billion per year, with the federal government projected to lose about $100 billion per year.6 The Penn Wharton Budget Model has found that the amount of income available to be taxed by the states if they tax GILTI to be in the same range (about $200 billion in 2020). Based on that $200 billion estimate, states could raise $15 billion in new revenue if they applied a 7% rate (about the current average).7 This would represent about a 30% increase in state corporate revenue.8 That is a lot of money. It is also important to keep in mind that states could borrow against a new revenue stream like GILTI in order to help pay for the immediate crisis. For the over forty states with a corporate income tax, the real question is why would they not raise this revenue from mobile capital and protect their tax base. Of course, representatives of MNCs have argued over and over that they should not and indeed that states cannot conform to GILTI.10 To date, these representatives have been successful in convincing almost all the states—even blue states, even blue states that could have really used the revenue before the current crises (I am looking at you, Illinois).11 Yet note that in many cases, states have not acted one way or the other and that states are still considering the issue.12 Even states that have affirmatively chosen not to tax GILTI can change their minds in light of recent events. Accordingly, I will argue at length in this Article (and have argued briefly elsewhere),13 that the states should and could conform to GILTI. Or, to be more precise, the states should strategically conform because, as we will see, the states should not conform to every aspect of GILTI as applied at the federal level.14 Strategic conformity means that the state should conform in ways that make the state versions of the law more effective at combating income stripping than the federal law on which it is based. Though I cannot prove it, I suspect that the ferocity with which the industry has fought state conformity to GILTI is related to a similar assessment about the possible effectiveness of state GILTI regimes as compared to the federal regime.
CIT---Evasion
No evasion deficit---GILTI at the state-level alone ensures compliance---the perm is piggybacking which decks solvency
Shanske 21 [Darien Shanske; Ph.D. from UC Berkeley in Rhetoric, clerk for Judge Pierre N. Leval of the United States Court of Appeals for the Second Circuit; 2021; “HOW THE STATES CAN TAX SHIFTED CORPORATE PROFITS: AN APPLICATION OF STRATEGIC CONFORMITY”; https://southerncalifornialawreview.com/wp-content/uploads/2021/08/Shanske.pdf]
Second, there is an efficiency argument for taxing federal tax bases in strategic ways.49 This argument requires a few steps. First, a fundamental tenet of tax economics is that the amount of deadweight loss generated by a tax increases at the square of the tax rate. The jargon is convoluted, but the behavioral intuition is simple. Consider how much trouble you would go to avoid a 5% tax. Now imagine how much more trouble you would go to avoid a 20% tax. You might not do anything to avoid a 5% tax, but you would do a lot to avoid the 20% tax—hence the exponential growth in wasteful tax planning and lost government revenue.50 Note that this first point can be put a different way: all else equal, it is more efficient to raise revenue by broadening the base of a tax relative to raising the rate of a tax. Pulling GILTI back into a state tax base is a more efficient way of raising revenue relative to raising the corporate tax rate. But there is another way that GILTI conformity can be efficient, which brings us to analytic step number two. The second step requires making the observation that different taxes can be evaded in different ways. I can avoid paying income tax by deferring the sale of appreciated assets, but this does not help me avoid paying sales tax on my new car. I used to be able evade the sales tax by purchasing from a remote vendor online, but this never helped with the income tax. The fact that different taxes can be evaded along different margins has the following implications in the federal system as currently in operation: when the states try to collect more revenue by piggybacking on the federal income tax, they are essentially increasing an already high tax rate and spurring additional evasion. By contrast, when states raise revenue with the sales tax then they are raising money using relatively low tax rates that do not cause as much evasion.
Tax evasion reforms at the state level increase state funds and the effectiveness of heightened corporate tax rates.
Bivens 2022 – Josh Bivens is the chief economist at the Economic Policy Institute with areas of research in macroeconomics, inequality, social insurance, public investment, and the economics of globalization, “Reclaiming corporate tax revenues,” April 14th 2022, Economic Policy Institute, https://www.epi.org/publication/reclaiming-corporate-tax-revenues/
Corporate income taxes—both at the federal and S&L level—are highly progressive parts of the U.S. fiscal system. The erosion of revenues collected from corporate income taxes has made the overall tax system less progressive, and at the state level it has been a key driver of overall revenue weakness, which in turn has fueled too-austere spending.
The S&L sector is vitally important to the economic health and quality of life of U.S. families. It plays a leading role in the direct provision of valuable public goods and services. But the sector’s ability to provide these services well is highly constrained by how much revenue can be raised. Corporate income tax cuts in recent decades have compromised this revenue collection.
A number of obvious reforms could help stem these losses. Statutory corporate income tax rates could be raised. (Given the enormous cut in corporate income taxes at the federal level in 2018, even very large increases in state corporate income tax rates would leave capital-owners far better off than they were just a few years ago.)
Besides changing statutory tax rates, reforms should also focus on the tax base. Corporations undertake a range of tax evasion techniques to minimize the scale of taxable profits they report to governments. While federal government changes have failed to rein in these tax evasion efforts, there are a range of reforms states could undertake on their own to force a more honest accounting of taxable profits.19 Most fundamentally, new legislation forcing transparency in regard to which profitable corporations pay taxes in a state and which do not could help educate the public about this issue.
Finally, of course, other bases of income—like business income earned by entities besides C-corporations—could also be tapped for more revenue. The rise of S-corporations highlights how business forms have been manipulated for tax evasion. There is no reason legislators must let that stand—the new business forms (or their owners) could certainly pay more in taxes.
The counterplan’s tax reforms allows the states to implement a substantial corporate tax and close federal tax loopholes.
Mazerov 2019 – Michael Mazerov is a Senior Fellow with the Center on Budget and Policy Priorities’s State Fisal Project, focusing on state and local taxation of business under corporate income and sales taxes, “Commentary: Federal, State Laws Helping Corporations Avoid State Income Taxes,” November 11th 2019, Center on Budget and Policy Priorities, https://www.cbpp.org/research/state-budget-and-tax/commentary-federal-state-laws-helping-corporations-avoid-state-income
PL86-272, which Congress passed in just a few weeks and with little debate, was supposed to be temporary. But it’s been in effect for six decades and Congress hasn’t held a single hearing on its state impact since the early 1960s. We don’t know how much revenue it costs states collectively, but it may well be in the billions of dollars annually — money that could help pay for schools, parks, public health clinics, and other critical services. The law also creates an unlevel playing field for small in-state manufacturers and wholesalers, which must pay tax on 100 percent of their profits.
This is bad enough. Worse, many corporations have figured out ways to exploit this tax break even when they shouldn’t qualify for it. For example, let’s say a manufacturer can’t limit its activity in its customers’ states to soliciting sales because it sells a complicated piece of equipment that it needs to set up at the customer’s facility and teach the customer how to use. So the company incorporates a separate subsidiary to employ the people who do the set-up and training. The subsidiary’s profit is subject to tax by the buyers’ states, but the company’s out-of-state manufacturing arm — which earns most of the profit on the sale — remains protected from taxation in the states where the equipment is delivered. This strategy is known as “entity isolation.”
“Nowhere Income” Goes Untaxed by Any State
But it gets worse still. A complementary change in state tax policy has supercharged the tax breaks from PL86-272 in ways that aren’t widely understood. Here’s how it works.
States have historically taxed the profit of a multistate corporation by taxing a share of its nationwide profit, not its profit from specific sales to the state’s residents (which would be too difficult to track). That share is determined by an “apportionment formula” set out in state law. The traditional formula gives equal weight to how much of the company’s nationwide property, employee payroll, and sales are in the state. But if companies make sales in states where they aren’t subject to tax due to PL86-272, some of their profits will be “nowhere income” — profit not taxable by any state.
To see this, take the example of a company with 40 percent of its property, 30 percent of its payroll, and 5 percent of its sales in Connecticut. Under the traditional formula, 25 percent of its nationwide profit (the average of those three figures) would be subject to corporate income tax there. If the other 60 percent of its property and 70 percent of its payroll were in Pennsylvania, along with 20 percent of its sales, 50 percent of its profits would be taxable in Pennsylvania. Under this scenario, 75 percent of the company’s nationwide profit would be taxable in Connecticut and Pennsylvania combined. Assuming PL86-272 protects the company from income taxation in every other state, the other 25 percent would be untaxed “nowhere income.”
Compounding the problem, over the last 30 years corporate lobbyists have convinced most states to abandon the traditional apportionment formula and switch to one that looks only at the location of sales.[2] This change greatly boosts the amount of “nowhere income.” Under the above scenario, for example, if Connecticut and Pennsylvania switched to a sales-only formula — which, in fact, both have — then only 25 percent of the company’s nationwide profit would be taxed in those two states, and the share that’s “nowhere income” would jump to 75 percent.
States Can Make Corporations Pay Fair Share of Tax
PL86-272 and sales-only apportionment formulas lead — both independently and together — to some extremely costly and unfair tax outcomes for states, taxpayers, and residents who rely on state services. They are big reasons why the state corporate income tax has seriously eroded as a state revenue source. They also illustrate the power of corporate lobbying at the federal and state levels to achieve favorable tax rules and the ways corporations then exploit the rules to reduce their taxes even further. But state policymakers and tax administrators can mitigate the damage.
For example, about half the states have eliminated “nowhere income” through rules declaring that if an in-state corporation sells products in other states in which the company isn’t taxable because of PL86-272, those sales are deemed to be made in the state and thus taxable there.[3]
A growing number of states are also trying to nullify the “entity isolation” scheme by enacting laws declaring that if even one subsidiary in a corporate group is taxable in the state, a share of the combined profit of the entire group is subject to tax. This reform is a variant of a tax accounting method known as “combined reporting.”[4]
Although a handful have considered it, no state has yet adopted what could be states’ most powerful weapon to protect their corporate income taxes: requiring corporations to report publicly how much income tax they pay each state. Publicly traded corporations have to include information in their annual reports about how much federal income tax they pay and their total state income tax, but not their income tax for individual states. In fact, corporations don’t have to publicly disclose whether they even file a tax return in a given state.
It doesn’t have to be that way. States should pass laws requiring company-specific public disclosure of the annual bottom-line corporate tax payment, together with a limited amount of additional information from the tax return to help the public understand how state tax laws affect the company’s tax liability (such as its savings from economic development subsidies).[5] Hard evidence of how little state income tax many corporations pay might create political pressure for policy changes like adopting combined reporting.
States should also require companies making sales in the state but claiming PL86-272 protection to publicly report that fact, the level of sales, and the amount of corporate income tax they would pay if PL86-272 didn’t exist. This concrete information on how much corporate tax revenue the law costs states would likely help spur debate over repealing it.
CIT---Strike Down
Federal statues do not preempt GILTI taxes---empirics disprove SC action
Shanske 21 [Darien Shanske; Ph.D. from UC Berkeley in Rhetoric, clerk for Judge Pierre N. Leval of the United States Court of Appeals for the Second Circuit; 2021; “HOW THE STATES CAN TAX SHIFTED CORPORATE PROFITS: AN APPLICATION OF STRATEGIC CONFORMITY”; https://southerncalifornialawreview.com/wp-content/uploads/2021/08/Shanske.pdf]
The federal government has decided to encourage capital investment by permitting taxpayers to depreciate capital assets. Can a state really ta4ke advantage of this choice and tax capital investments more heavily by slowing down depreciation? Would some kind of conflict preemption not come into play? As I have argued at length elsewhere,102 I think the answer is no. Ordinary federal tax statutes do not have the effect of preempting state tax law because such a rule would dramatically undermine the revenue power of the states. The federal choice to encourage capital investment is a very expensive one; it would be extraordinary if that choice now meant that all states also had to permit full expensing of capital equipment. In fact, the Supreme Court has permitted states leeway in the area of international taxation. The states did not and do not approach the income of MNCs in the same way as the federal government. Among other differences, the federal government, consistent with international norms and treaties, uses foreign tax credits and a methodology called transfer pricing to divide the income of MNCs. Not so the states; they use apportionment. Taxpayers argued that the states were not free to deviate from the federal government in this way. However, the Supreme Court held clearly, twice, that the states are not implicitly bound to follow the federal government even in a context where the taxpayers could plausibly argue that the harm from nonconformity had reverberations beyond other state-federal differences.103 And this makes sense. Given the relative import of MNCs, requiring states to follow the federal lead “only” as to their international operations would amount to a serious limitation on state revenue power.10
Funding---Deficit Spending
Deficit Spending---Biennial Budgeting
Biennial budgeting allows states to budget deficit in one year and recover in the next.
Randall and Rueben 2017 – Megan Randall is a research associate in the Urban-Brookings Tax Policy Center and in the Urban Institute’s Research to Action Lab, focusing on state and local public finance, federal place-based programs, state and local economic development policy, and inclusive economic recovery; Kim Rueben is the Sol Price fellow and director of the State and Local Finance Initiative at the Urban-Brookings Tax Policy Center, and she is an adjunct fellow at the Public Policy Institute of California; “Sustainable Budgeting in the States: Evidence on State Budget Institutions and Practices,” November 27th 2017, Urban-Brookings Tax Policy Center, https://www.urban.org/sites/default/files/publication/93461/sustainable-budgeting-in-the-states_2.pdf
Budgeting Timelines, Forecasting, and Baselines
States budget on different timelines, forecast revenues with diff

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