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Closing tax loopholes will benifit our schools

Published 7:59am Wednesday, April 6, 2011

A national news story just came out that one of America’s largest corporations, General Electric, did not pay a dime in federal income taxes after making worldwide profits of more than $14 billion. Corporate tax avoidance is certainly epidemic, but nothing could bring home the problem of shell games and loopholes like this.

The idea that a company can make billions and pay less tax than a single working person has caused growing anger and disbelief about the unfairness of our system.

The fact is, working families pay their taxes every day. We see income taxes deducted from our paycheck, and we pay sales tax in the grocery checkout line. Now we see a major company like GE make some of the largest income in its history and pay nothing at all.

For those of us who have been keeping an eye on the Alabama tax system, this is nothing new. We have known for a long time that major out-of-state corporations game the system and pay little or nothing in state income taxes.

The armies of corporate tax lawyers and accountants know Alabama is a place where gimmicks are easily used, and loopholes are exploited to their farthest extent.

The clearest indication that major out-of-state corporations aren’t paying their fair share is that while individual state income tax revenue is up from last year, corporate state income taxes are actually down. This decline comes at a time when corporations like GE are reporting record profits.

They tell Wall Street that their income is up substantially, while telling Alabama they made little to nothing. It’s all legal, and it’s all wrong.

Every penny of state income tax is earmarked for education. When a company can exploit loopholes and use shell games, it hurts schools, it hurts children, and it puts our state’s future in jeopardy. It also puts local small businesses at-risk because they pay their taxes.  When major companies do not, it puts the small firms at a competitive disadvantage.

It is time to close the loopholes, make corporations pay their fair share for schools, and level the playing field for local small business. Alabama House Democrats have introduced a series of bills that will close some of the worst loopholes, and bring in more than $200 million in desperately needed funding for education.

One bill is called Combined Income Tax Reporting. It stops the practice of moving income made in Alabama to other states on paper. Here’s how that loophole works.

Let’s say a high priced corporate tax lawyer in Birmingham makes $900,000 working at his desk. His firm has additional offices in Nashville and Atlanta, so he is allowed to move on paper $300,000 of income each to Tennessee and Georgia, reducing his in-state income to $300,000. He tells the federal government he made $900,000 and pays $300,000 in federal income tax. He deducts his $300,000 federal taxes income from the $300,000 he reported to the state of AL.

By working this shell game, the lawyer made almost a million dollars yet reports no Alabama income. He will pay less state income tax than a mechanic making $30,000.

That is wrong, it happens all the time, and it must stop.

The good news is the Bentley administration has already begun the work to close this loophole. They recently announced rule changes the Alabama Department of Revenue follows on combined reporting that will hopefully stop this shell game.

The governor estimates it will raise $30 million for schools next year, and an additional $17 million each year thereafter.

We will continue to work for passage of the combined reporting bill to forever close this loophole and continue the effort to close others.

Making major out-of-state corporations pay their fair share of taxes is right for schools, right for small business, and right for every Alabama citizen. It is simply a matter of closing loopholes that other states do not allow.

They will dig in to protect their shell games and gimmicks. It is up to us as legislators to make sure our system is fair for all.

Johnny Mack Morrow is a state representative for Franklin County. His column appears each Wednesday.

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