Leveling the playing field for small businesses
The backbone of our state economy and communities is locally owned small businesses. They are integral to our way of life and anchor everything from our churches to schools. They make our lives better by doing the little things like sponsoring baseball teams or girl scouts. Most importantly, in any economic recovery, it is small business where most of the new hiring is done, and it is they who will lead our state forward.
In Alabama, it is fast becoming clear that our local small businesses do not have a level playing field to compete with large out-of-state corporations, putting them and us at-risk. We are not talking about things like the economy of scale or the money to advertise — it is our own tax system that puts local business at a disadvantage.
According to 2005 Alabama Department of Revenue figures, 1,056 major out-of-state corporations that do business in Alabama had income totaling $105 billion. Yet, they paid nothing in state income taxes. You read it right: zero taxes. By creating and using loopholes and gimmicks, or waiting to see if a state auditor would check, these corporations (many household names) pay nothing while local business pay their share for local schools. It is a huge disadvantage for the local business.
In order to shield so much Alabama income, these large companies employ an army of lawyers and accountants to come up with dodges. One of the worst gimmicks was something called real estate investment trusts, or REITs for short. Such trusts allowed companies to pay themselves rent on building they owned in Alabama and then deduct it from their state income taxes.
Sounds crazy but it is true, and here is how it worked.
Major retailers would set up real estate subsidiaries in Delaware or Nevada. They then transfer ownership of its Alabama buildings to this subsidiary and begin to pay a high “rent” to this trust. That rent would then be transferred back to the parent company as dividends that are not taxed as income under state law.
It would be like you setting up a company in another state, transferring your house deed to that company, then calling your mortgage payment rent and deducting that from your state income taxes. You still own your home, gain all the financial benefits of its value, but by sleight of hand you’ve changed it into a huge state income tax deduction.
Obviously, most of us do not have the tax lawyers to pull this off and the money to incorporate in Delaware. More to the point, every dollar of state income tax is earmarked to pay for teachers and schools. When a gimmick like this is used, it is literally stealing from children.
It also is hurtful to small business. The local muffler shop pays its Alabama taxes. When the muffler chain down the street does not by using an accounting trick like a REIT, it puts the local business at a competitive disadvantage.
It is easy to see that a REIT is wrong. It hurts local business and it hurts education. Yet, it took the Legislature two years to close this kind of loophole, which it did in 2008. The lobbyists for these companies fought to keep the shell game going, and after a hard battle, this loophole was finally closed.
There are many more loopholes and accounting tricks still out there. We also have a lack of state auditors and tax experts to catch all the gimmicks and dodges major out-of-state corporations use to stop paying taxes going to schools.
Alabama has the lowest taxes in the nation by far, collecting less state and local taxes than any other state. Yet, out-of-state corporations still work to pay nothing.
The 2011 legislative session begins this week, and we’ll begin the process of writing the school budget for next year. Instead of looking to huge teacher layoffs and more cuts, we should first look to see that major corporations pay their fair share, close the worst loopholes, and beef up enforcement in the revenue department.
It is the right thing to do for schools, and it certainly is the right thing to do for our local small businesses that pay their fair share.
Johnny Mack Morrow is a state representative for Franklin County. His column appears each Wednesday.
