State Representative Fred Hawkins (Republican; St. Cloud) has filed House Bill 999 that would mandate multistate and multinational companies to file a single Florida corporate income tax return covering their entire business, rather than letting them file separate returns for subsidiaries. It’s a concept known as mandatory unitary combined reporting (MUCR).
In its most simple terms, the adoption of mandatory unitary combined reporting would expand the number of entities required to file and pay Florida corporate income taxes. The legislation would require separate legal entities located completely outside of the State to begin paying Florida corporate income tax if they have common ownership with a Florida corporate taxpayer. By design, the legislation would tax income resulting from activities occurring outside of the State.
Some proponents suggest the legislation would make it more difficult for big companies to avoid income taxes those advocates think should otherwise be due by shifting profits out of Florida. The often used headline to “close corporate loopholes” suggests one simple solution will result in a tax panacea. However, those proponents ignore the multiple issues resulting from MUCR, and specifically House Bill 999’s provisions, that will negatively affect Florida businesses, their employees and consumers, and the State’s general revenue collections.
Arbitrary Assignment of Income & Significant Administrative Burdens
As MUCR is designed to capture the income of companies located out of the State, the legislation will reduce the link between state income tax liability and where the income is actually earned. This will result in Florida taxing business profits regardless of whether the activities generating that income occurred outside of the State. Thus, creating a significant risk that MUCR will arbitrarily attribute more income to a State than is justified by the level of a corporation’s real economic activity in the State.
The complicated mechanics proposed by the legislation create new distortions in properly assigning income to different States. As an example, House Bill 999 would provide that any corporation with fifty percent or more of its voting stock owned, directly or indirectly, by a water’s edge group is presumed to be a member of the taxable group. While it is likely difficult enough to determine all members of a group based on an indirect ownership interest, the legislation then expands a water’s edge group to any companies with less than a fifty percent ownership “if the business activities of the corporation show that the corporation is a member of the water’s edge group,” without additional guidance or clarification. These complex provisions and ambiguities create significant unknowns for businesses.
The bill’s assumption that all corporations in an affiliated unitary group have the same level of profitability is neither consistent with economic theory nor real-world business experience. There will be significant increases and decreases in tax liabilities for specific businesses. Depending upon the industry distribution of winners and losers, adopting MUCR will likely have a negative impact on a state’s overall economy.
Moreover, economic theory and common sense suggest that any tax increase resulting from adopting MUCR will ultimately result in fewer jobs or Florida consumers paying higher prices for goods and services.
Increased Volatility to State Revenue
What’s good for the goose is good for the gander. MUCR proponents suggest that the proposed legislation may result in Florida receiving up to an additional $477 million in corporate taxes collected annually. See Breaking from big business, some Florida Republicans call for closing corporate tax loopholes. However, the official estimates conducted by the State’s lead economists recognize that with the potential to start taxing new out-of-state profits, comes the likelihood of new out-of-state business losses reducing Florida’s corporate income tax revenue collections. Passage of the legislation will effectively add increased revenue volatility to a tax source which has historically been fairly stable and reliable during good economic times and bad.
At a time when the State is facing significant revenue shortfalls due to the COVID-19 pandemic, adding unnecessary unpredictability is not a fiscally conservative decision. If Florida were to pass MUCR, it is likely that corporate revenue collections would fall faster and farther during an economic downturn, as out-of-state losses could be pulled into the State.
Florida Already had a Failed MUCR Experiment
We’ve seen this show before, and it didn’t end well. In 1983, the Florida Legislature passed a unitary corporate income tax. As a result, IBM cancelled a $50M three-building expansion in Boca Raton. At that time the company said the “unitary tax was the sole reason” for the decision not to expand in the State. See IBM scraps Boca Raton expansion. Ultimately, IBM decided to move its headquarters out of the State.
The backlash from Florida’s brief experiment with the unitary tax resulted in then Democratic Governor Bob Graham and the Legislature reversing the unitary tax during a Special Session in 1984.
2022 Corporate Income Tax Rate Increase
In addition to the specific issues highlighted above with MUCR, now is not the time to create another tax increase on Florida’s corporations. Those companies are already staring down the barrel of a likely half billion dollar corporate income tax starting January 1, 2022.
This tax increase is a result of federal corporate income tax changes in late 2017, the Tax Cuts and Jobs Act (TCJA), and Florida’s response during the 2018 and 2019 Legislative Sessions. During those Sessions, House and Senate members recognized the federal corporate income tax change would result in tax base expansions and would likely result in more Florida Corporate Income Tax paid to the State. In order to mitigate that tax increase, which came in at approximately $700 million, the Legislature passed temporary tax refunds and ultimately a just-over 1% corporate income tax rate reduction. That temporary tax rate reduction will expire in 2022. State economists estimate this rate change will likely result in a $500-550 million tax increase on Florida’s businesses annually.
Now is not the time to overhaul and expand Florida’s corporate income tax to capture out of state entities. Now is not the time to substantially increase the corporate income tax paid by Florida’s employers. Now is the time for the State to focus on rebuilding its economy after the pandemic, not stifle it.