The Disclosure of State Corporate Income Tax Data: Turning the Clock Back to the FutureCapital University Law Review (1993)
Public access to federal tax return information has been evaluated and debated since the enactment of the first federal income tax. As a way to fund the Civil War, the Revenue Act of 1862 imposed an income tax on individuals, and provided that members of the public were entitled to examine the names of taxpayers and their liabilities. The initial purpose of this public disclosure was to notify potential taxpayers of the amounts being assessed against them, not to permit the public scrutiny of individual taxpayers. The Revenue Act of 1864 changed that, making all returns open for public inspection and allowing newspapers, in a move that several publishers considered controversial, to publish the income and tax liabilities of all taxpayers. As public opinion turned against the income tax, Congress prohibited the publication of tax returns in 1870 before ending the income tax altogether a year later in part due to privacy concerns.
The 1894 revival of the federal income tax, which applied to both individuals and corporations, was mindful of the privacy concerns that plagued its predecessor and forbade the publication of any tax return. Although this income tax was ultimately found unconstitutional, it is significant to note that the privacy guaranteed to individual taxpayers in the Act extended to corporate filers as well, thanks almost entirely to the residual public support for individual return privacy.
The Payne-Aldrich Tariff Act of 1909, the predecessor to the modern corporate income tax, provided that corporate returns would be publicly disclosed in response to growing national distrust of corporations, an interest in informing investors, and the belief that public disclosure would expose and deter dishonest business practices. The public disclosure of corporate returns was unpopular with small corporations, and they banded together to eliminate the publicity requirement on the grounds that it had a disproportionate effect on smaller corporations and discriminated between corporations and other business types. In 1910, the Commissioner of Internal Revenue ruled that the publicity feature would not be enforced without specific appropriation by Congress for its funding. In response, Congress appropriated funds for public disclosure, with the caveat that the returns would only be made public under rules prescribed by the Secretary of the Treasury. The Secretary in turn provided regulations dictating that returns would be only be available to the shareholders of a corporation who could show cause for inspection and to any member of the public for any corporation that offered their stock for public sale. Returns were only available at the office of the Commissioner and it was prohibited to publish any section of the returns, severely restricting public access. Executive discretion of disclosure would end with the Tax Reform Act of 1976.
The Income Tax Act of 1913 addressed both individual and corporate income taxation, and similar to the Payne-Aldrich Tariff Act, granted the Treasury the power to regulate public access to return information. The Secretary ultimately did not use this authority to allow public access to individual returns, though in 1918 the Commissioner did relent to disclosure advocates and allowed the public to view lists of individual taxpayers who filed returns in a specific district. The publication of this information was prohibited.
The Revenue Act of 1924 required the names of both individual and corporate filers to be disclosed with their tax liabilities, on the basis that disclosure would discourage evasion and end improper business methods. The public availability of this information was opposed by the Secretary of the Treasury Andrew Mellon and President Calvin Coolidge, who argued that publicity would do nothing to raise revenue, actually encourage tax evasion, and serve only as popular fodder for newspapers. The newspaper publications that followed were predictably disparaged by many for the breach of individual privacy, the failure to uncover tax evasion, the questionable use of the information by the public, and the cost of disclosure to the government. In 1926, the law was changed to exclude liabilities from public disclosure, requiring only the taxpayer’s name and address. This remained the rule until 1966.
As a result of a well-publicized income tax evasion scandal and the urging of publicity advocate Senator Robert LaFollette, Jr., Congress revisited the disclosure requirement in 1934, a time during the Great Depression in which popular resentment against the rich was palpable. Rather than publish the full tax return, each taxpayer was required to complete a “pink slip” containing their name and address, gross income, deductions, net income, credits, and tax liability. These pink slips were then made available to the public, and were again justified by the assumption that publicity would deter tax evasion. In opposition to the pink slip requirement, the anti-disclosure group, “Sentinels of the Republic,” led a large taxpayer protest. Congress was moved by the concerns of individual taxpayers, and repealed the pink slip requirement for both individuals and corporations in 1935 before the law could take effect. Once again, corporate disclosure was influenced by popular sentiment against individual disclosure.
The Securities Act of 1933 and the Securities Exchange Act of 1934 created the Securities Exchange Commission, an agency tasked with regulating corporate financial disclosure in the wake of the Great Depression. The SEC mandates extensive disclosure of corporate income tax data, and has never entertained the arguments against income tax publicity. These disclosures, presented on a Form 10-K, must be made available to any shareholder upon request, though all members of the public are able to access this information through the SEC’s electronic data gathering analysis and retrieval system – EDGAR.
In the 1980s, Citizens for Tax Justice revealed, through analyzing financial data disclosed to the SEC, that many of the largest corporations were paying little to no federal income tax. The 1986 Tax Reform Act sought to mitigate loopholes used by corporations, repeal the investment credit, and strengthen the alternative minimum tax. The reforms increased tax revenue, which allowed the government to lower the top corporate income tax rate to 35%, and leveled the playing field for competitors.
At the time of this writing, four states had enacted disclosure laws to help inform their tax policy in the same way the revelations by CJT guided federal tax reform. In Massachusetts, a compromise among the Tax Equity Alliance for Massachusetts, the business community, and the Legislature called for the creation of the Special Commission on Business Tax Policy to study Massachusetts business taxes and the annual disclosure of financial information of publicly traded corporations, banks, and virtually all insurance businesses in the state. In addition to being available to the public, the disclosed information is used to create an aggregate report detailing tax information by business type and size. The disclosure law may be subject to changes down the line, such as the substitution of the business’s name with an anonymous entity identification number to be changed year after year, as proposed by the Special Commission.
West Virginia requires the publication in the State Register of the name and address of any taxpayer receiving a state tax credit with the name and amount of each credit received. Designed to promote accountability and efficiency, the disclosure requirement revealed that the coal industry was the major beneficiary of the state’s investment and jobs expansion credit, a credit that was additionally discovered to cost the state enough tax revenue to effectively eliminate all state tax liabilities for a thirteen year period for most qualifying tax payers. While the disclosure requirement received only token resistance, large companies won a significant victory with the maximum reporting category being designated as “more than $1,000,000,” allowing companies to effectively conceal state credits that often exceeded $10,000,000.
Arkansas authorizes the disclosure of any taxpayer’s state tax credits, rebates, discounts, or commissions for the collection of a tax. No publication of the disclosed information is required, and members of the public must file a request with the Director of Taxation to view the information. Taxpayers then have up to seven days to challenge the release if they can prove it would give an advantage to competitors.
Wisconsin requires the Department of Revenue, at the request of any Wisconsin resident providing identification and paying a four dollar per return fee, to furnish the amount of income tax paid by any taxpayer. The requesting party’s identification information is then forwarded to the individual or corporation whose tax data was requested. Being the older of the four disclosure states, there is unique proof in Wisconsin of publicity positively influencing proposed tax policies. The Wisconsin Action Committee, for example, used the disclosure requirement to create a list of major corporations doing business in Wisconsin without paying any state income tax. Their discoveries helped twice to fashion a proposed corporate minimum state income tax, though the legislation was ultimately vetoed on both occasions.
As it pertains to publicly traded corporations, the arguments favoring the state level disclosure of disaggregated tax information easily outweigh the arguments opposing disclosure. Firm-specific information allows policymakers to consider a range of issues surrounding corporate tax policies through microsimulations, the creation of statistical aggregates, and the identification of transfer pricing abuse. Disclosure without identification of the taxpayer hinders the policymaking justification for disclosure, as any meaningful analysis requires identification to aid in data comparison and categorization. Finally, disclosure allows the public to access and form an understanding of the issues germane to corporate tax reform, a topic that would otherwise be limited to a small group of experts, and further encourages a climate of accountability and openness consistent with the goals of the SEC.
Opponents to disclosure consistently argue that mandatory disclosure will reveal proprietary information to competitors, though the support behind this argument is dubious. In 1973, the SEC was unsympathetic to arguments that the reporting of more extensive federal income tax data would reveal tax strategies to competitors. Indeed, opponents to disclosure have never been successful in providing a detailed example of how the disclosure of tax information reveals anything of competitive value. Ultimately, the disclosure of tax data is unlikely to give competitors any value because comparable information is typically available from other reports and because information would be presented in tax, rather than financial, accounting in its aggregate form. Even if one were to accept the untenable idea that disclosure would affect competition, the resulting flow of information would be in line with the principles of a market economy.
Finally, opponents to disclosure argue that it would undercut a state’s business climate. Presumably, mandatory disclosure would drive businesses out because of the perceived lack of state goodwill towards businesses. While any tax policy can be characterized as affecting a business climate, it is unlikely that disclosure, a tax policy that has no effect on a corporation’s bottom line, would have a significant impact on a business’s perception of a state’s business climate. If the business climate were truly impacted by disclosure, corporations would respond in unique ways. Some may welcome the opportunity to show that corporations pay their fair share of taxes. It’s unlikely, however, that a business would move from the state as a result of a disclosure requirement, especially if such requirements became widespread.
Individuals have a higher expectation of privacy, and as such this article suggests that a state’s disclosure requirement be limited to foreign or domestic publicly traded corporations, banks, utilities, and insurance companies doing business in the state. However, with respect to the public’s right to know who is receiving state funds, this limitation should not be applied to the disclosure of tax expenditures. Situations in which the state spends money through tax provisions should be disclosed regardless of whether the beneficiary is an individual or a business. Tax expenditure disclosures should at a minimum include the amount of the special tax provision and the beneficiaries’ savings resulting from the beneficial treatment, and supplemental information that allows the state to evaluate the efficacy of the tax expenditure would be prudent depending on the tax policy’s purpose. As it pertains to disclosure under normative state tax provisions, states should require disclosure of financial and tax accounting income to identify where and how the tax code can be brought closer to economic realities.
Citation InformationRichard D. Pomp, The Disclosure of State Corporate Income Tax Data: Turning the Clock Back to the Future, 22 Cap. U. L. Rev. 373 (1993) (Symposium Issue).