Skip to main content
Business Observer Thursday, Apr. 23, 2009 11 years ago

Taxing Unity

The unitary tax failed in the 1980s, but is back in the Legislature as the state tries anything to get more revenue.
by: Jay Brady Government Editor

The unitary tax failed in the 1980s, but is back in the Legislature as the state tries anything to get more revenue. But if it was a bad idea then, why have three Senate committees passed it — overwhelmingly?

The Florida Senate is moving forward on what has been described as, “One of the most controversial business tax policy issues currently debated...”

That's the assessment of Robert Cline, director of tax policy at Ernst & Young and former tax research director for the states of Michigan and Minnesota, on the push for a state unitary tax on businesses.

The Florida Chamber of Commerce says the tax is “harmful,” and that it “would increase costs to Florida's employers.”

Yet three state Senate committees dominated by Republicans overwhelmingly passed a bill that would mandate unitary, combined reporting for multi-state corporations.

Essentially, the unitary tax means that a company headquartered in another state, but with a plant or other operation in Florida, would be required to pay separate taxes to Florida on the profits from that plant or operation.

This combined reporting would take the place of the much simpler consolidated reporting. Known as the unitary tax, it is the key provision of Senate Bill 2270, sponsored by Sen. Dan Gelber, D-Miami Beach. If made law, it would go into effect Jan. 1, 2010.

Four out of five Gulf Coast senators on those committees voted to support the bill, overlooking concerns that an increased regulatory burden on corporations and state auditors comes with combined reporting. Supporting the bill were Sen.

Dave Aronberg, D-Greenacres; Sen. Nancy Detert, R-Venice, Sen. Victor Crist, R-Tampa, and Sen. Charlie Justice, D-St. Petersburg.

The one senator who voted against it, Sen. Mike Bennett, R-Bradenton, is taking a more deliberative approach than his colleagues. He isn't totally opposed to the bill just yet, however; he just wants basic questions answered by the Florida
Department of Revenue, such as how much money is involved, what corporations would be affected, and what companies might leave the state. The department won't be able to tell him which companies might never come to the state because of the tax.

He says, “It was not a well-thought out process. They (FDOR) could not answer questions.” He stresses, “What they couldn't tell me was, 'What is the impact?'”

One impact is the fear of the perception of Florida as a more hostile business climate. In 1984, the Legislature repealed the domestic and worldwide unitary income combination and the taxation of foreign source dividends. So, why the comeback attempt?

The main reason: Money. Specifically, the state's $3 billion deficit. Legislators are looking for revenue wherever they can find it, especially if it doesn't look too much like a tax increase. And they can still find supporters when the plan is to spend the guesstimate on university and community college workforce education and school districts.

But one industry group study argues that the measure is an increase in effective corporate tax rates. As such, they say it's counterproductive to job creation, capital investment and economic resurgence.

Further, they maintain it will not generate more revenue after corporations' rising net operating losses are factored in, if in fact such loss carry-forwards are allowed. “There is no policy or theoretical justification for doing otherwise,” says Joe
Crosby, Senior Director of Policy for the Council on State Taxation.

Aronberg, whose district includes parts of Charlotte and Lee counties, voted for the bill in a 3-2 vote by the General Government Appropriations Committee, the Senate's last scheduled committee stop. Aronberg says the state needs the money to avoid cutting public safety services. But the bill calls for any revenue to go to education.

Currently, corporations required to pay the 5.5% income tax have the option to file their returns in one of two ways. They can either file separate tax returns for each legal entity doing business in the state or on a consolidated basis.

If adopted, the law would drop consolidated reporting, and mandate combined reporting by requiring the filing of a combined return that apportions income to Florida using a single computation. It's not as simple as it might sound.

Audits, appeals and litigation
For a multi-state enterprise, separate filing treats each corporation as a separate taxpayer. So, each corporation includes only its income on the corporate tax return. Combined reporting treats affiliated taxpayers (parents and subsidiaries) engaged in a unitary business as a single group in determining taxable income.

That's where the “fun” begins. The legislation would apply to “a group of corporations related through common ownership whose business activities are integrated with, dependent upon, or contribute to a flow of value among the members,” according to a Senate bill analysis. All income of members of a water's edge group is presumed unitary, hence the name: unitary tax.

According to the bill analysis, the new combined reporting includes additional regulatory reporting requirements on all multiple-entity groups, disallows consideration of intergroup transfers that currently reduce Florida tax liability, and expands the reach of the corporate income tax to include more corporations than with consolidated reporting. In essence, a tax increase.

Cline's research is contained in a May 2008 Ernst & Young study of the issue for the Council on State Taxation. The study, “Combined Reporting — Understanding the Revenue and Competitive Effects of Combined Reporting,” explains how combined reporting leads to significant taxpayer compliance costs and state administrative costs.

In the study, Cline describes the battles between corporations and tax administrators over which corporations to include in the unitary group. The study concludes that, “More complex audits and appeals and increased litigation can be expected as a result of the unitary determination in states adopting combined reporting.”

Investment, jobs, money
The Ernst & Young study brings to light several issues.

One of the study's key findings is that “Economic theory, empirical studies and economic simulation modeling all suggest that switching from separate filing to combined reporting will have a negative impact on a state's economy.”

The study's author, Robert Cline, sees the big picture. If it increases tax revenues, that would increase taxes on corporations, which would lead corporations to reduce investment and job creation in the state.

That's a big “if.” The Minnesota Department of Revenue found that combined reporting reduced taxes by about 9%. Another recent Ernst & Young study of Maryland's corporate tax policy options showed that combined reporting had a negative impact on the Maryland economy for little change in revenue.

The combined reporting study points out the complications in the method, which makes revenue prediction so difficult and unreliable.

And that's an issue for Bennett.

But he also empathizes with proponents of combined reporting who argue there are benefits to state revenues in reducing “tax planning opportunities,” such as when companies incorporate in Delaware to take advantage of favorable corporate tax laws.

Opponents maintain that the additional costs related to combined reporting, such as the negative economic impacts of increasing effective tax rates, can be expected to reduce investments and jobs.

The two Senate committee reports both note that the revenue impact conference has not produced an estimate of the impact of the bill and it is uncertain according to Bennett and others whether one is forthcoming. A 2007 Florida Tax
Handbook predicted increased revenue of $365.5 million if the bill had been in effect in 2007-08, when economic conditions were not as bad as now.

As to private sector impact, the committee report only notes in a single sentence that, “The bill would increase tax burdens on corporate groups to the extent that they would have to report income that is currently untaxed under current

Florida law.” It's no wonder Bennett has questions.

Eyebrows are also raised at the predicted government sector impact of only $192,362 in non-recurring expenditures for the DOR to implement the new tax.

And although the Senate version doesn't have a companion bill in the House, and the House version of SB 2270 has gone nowhere so far, Bennett says there's nothing to stop these bills from being rolled up into a budget bill if that's what
House leadership wants.

Adding to the controversy is another conflicting Senate bill, SB 2546, working its way through the Senate. That bill also effectively increases the corporate tax rate by enacting so-called “add-back” and “throw-out” provisions. The add-back requires a corporation add more items to its taxable income. Throw-out laws, which the Council on State Taxation says “are not just bad tax policy, they are also constitutionally-suspect,” require companies to pay tax in one state on income earned, but not taxed, in another state.

The bill also sets limitations on the net operating loss that may be claimed by an affiliated group, thus also increasing a corporation's effective tax rate. Opponents argue that if the state is to require combining income then it should allow
losses to be combined as well.

These bills epitomize the old adage that seeing laws created is like watching sausage being made — you lose your appetite. These bills may yet be forced back through the sausage grinder, or they may be served up to businesses next year.


The unitary tax proposal is stunningly complicated. The following is from Senate Bill 2270, creating Section 220.1363, Florida Statutes:
220.1363 Water's edge groups; special requirements.—
(1) (g) For purposes of this section, the term “water's edge reporting method” is a method to determine the taxable business profits of a group of entities conducting a unitary business. Under this method, the net income of the entities must be added together along with the additions and subtractions under s. 220.13 and apportioned to this state as a single taxpayer under s. 220.15 and 220.151. However, each special industry member included in a water's edge group return, which would otherwise be permitted to use a special method of apportionment under s. 220.151, shall convert its single-factor apportionment to a three-factor apportionment of property, payroll, and sales. The special industry member shall calculate the denominator of its property, payroll, and sales factors in the same manner as those denominators are calculated by members that are not a special industry member. The numerator of its sales, property, and payroll factors is the product of the denominator of each factor multiplied by the premiums or revenue-miles-factor ratio otherwise applicable under s. 220.151.


Corporate Income Tax Revenues in Florida and the U.S.: Average Annual Growth Rates —1992-2007
Measure Florida United States
Nominal GDP 6.60% 5.30%
Total Tax Revenues 6.30% 5.70%
Corporate Income Tax Revenues 9.90% 6.70%
Sources: U.S. Census Bureau, Governments Division: State Government Tax; Collections. U.S. Department of Commerce, Buruea of Economic Analysis; Florida TaxWatch

Related Stories