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State Tax Reform: Proposals for Wisconsin
Marquette Law Review (2004)
  • Richard Pomp, University of Connecticut School of Law
In part because of the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986, state taxation has been become one of the most prominent fields of taxation. Gone are the days when federal income tax dominated tax planning. Corporate tax managers and advisors pay meticulous attention to state and local tax planning, while state legislatures are faced with modernizing their tax codes. State tax agencies are under staffed and over worked and competing with the private sector for valuable tax talent.  

Wisconsin uses formulary apportionment, rather than separate accounting, to derive the amount of a corporation’s income taxable by the State, using a formula based on the sales, payroll, and property attributable to Wisconsin. Wisconsin’s primary weakness in its corporate income tax is the absence of combined reporting. As the name suggests, combined reporting is a methodology that requires a unitary business to consolidate the income and factors of its unitary subsidiaries. Combined reporting allows a state to treat unitary subsidiaries like divisions of the parent company.  

Without combined reporting, a business in Wisconsin can create a subsidiary in a “tax haven” state (or country) and shift income from Wisconsin to that company where it will not be taxed. Combined reporting not only yields a better measure of apportionable income but also levels the playing field for intrastate companies that are unable, or unwilling, to engage in tax minimization strategies. Combined reporting will almost certainly raise revenue for the state.  

The adoption of combined reporting would have some detractors, particularly the interstate business community, which will find their common tax minimization strategies undone. The increased revenue from combined reporting can be used to finance public programs that attract and retain businesses. In general, tax considerations are a low priority for business location decisions.

Very often the main question asked when implementing a significant change in tax policy is whether the tax will be too high or low when applied to specific businesses compared to other states. The preferable method of making these comparisons is to measure the effects of a tax change on a corporation’s after-tax rates-of-return. The after-tax rates-of-return isolates tax differentials from other factors that influence profitability, considers the federal offset, determines whether a tax change will affect different businesses in different ways, captures the patterns of tax liabilities over time, and allows the state to customize tax changes for the businesses they are trying to attract.  

State taxes have an insignificant effect on economic development. Public spending can foster an environment that increases productivity and encourage growth, while tax cuts and incentives can, contrary to their stated purpose, undermine a state’s business climate. Wisconsin should have little to fear, and everything to gain, from combined reporting. 

In addressing state sales tax concerns, Wisconsin should direct its attention to an issue that frustrates the tax systems of any taxing jurisdiction: entity isolation. One example of entity isolation occurs when a business creates a related entity for the purpose of remote selling. States must have nexus with a taxed activity to levy a tax. The U.S. Supreme Court in Quill v. North Dakota held that businesses with no physical presence in a state, and that only engage in remote selling through a common carrier to customers in that state, have no nexus with that state. Does Quill therefore protect entity isolation? The decision did not broach the topic of related entities, but it seems as though creating a related entity solely for the purpose of remote sales within a state denotes a higher level of involvement than a mere connection through a common carrier, as was the case in Quill. Several states have amended their tax codes to require remote vendors to collect sales tax if they are selling goods similar to goods sold by a related brick and mortar entity within the state. Wisconsin should analyze these statutes and adopt the best features of each.

Finally, as it pertains to property taxes, Wisconsin should ask whether existing exemptions should be continued. The State’s scheme is unnecessarily generous and too removed from the purpose of property tax exemptions: the promotion of worthwhile nonprofit activities. Narrowing the property tax exemption for nonprofits can be controversial, but ultimately worthwhile. Wisconsin cannot afford to offer property tax exemptions carte blanche, and the Legislature should carefully consider the types of activities that should qualify for an exemption and the level of subsidization the activity warrants. In addition, the state should consider the following approaches: consulting the local jurisdiction before taxable property is purchased by a tax-exempt entity; phasing in the exemption to protect the local jurisdiction from a sudden decrease in revenue; phasing out the exemption after the business is established; limiting the amount of acres that can qualify for an exemption; limiting the amount of property that can be exempt; impose a user charge; or authorizing payments by the state to jurisdictions containing tax-exempt property.

Tax reform is never easy. But the way forward is clear, and it calls for the adoption of combined reporting, an update to the state sales tax to mitigate entity isolation, and reforming the state’s property tax exemptions. The road is clear; what is required is the action and courage of the Wisconsin legislature.
Publication Date
Citation Information
Richard D. Pomp, State Tax Reform: Proposals for Wisconsin, 88 Marq. L. Rev. 45 (2004).