Florida Democrats have tried and failed for years to close loopholes in the state’s tax code that allow big corporations to shift money to other states, a strategy that some analysts estimate costs Florida half a billion dollars annually.
But this legislative session, it’s a Republican lawmaker pushing to clamp down on tax avoidance by corporations, in an apparent to break from other GOP legislators and big business lobbyists who have fought hard to keep Florida’s tax laws as lax as possible.
Rep. Fred Hawkins, a freshman state legislator who previously served as a commissioner for Osceola County, has filed HB 999 that would force multistate and multinational companies to file a single tax return covering their entire business, rather than letting them file separate returns for each of their many subsidiaries. It’s a concept known as “combined reporting” and experts say it makes it much harder for big companies to avoid income taxes by artificially shifting profits out of Florida.
Hawkins would not respond to interview requests from the Orlando Sentinel. But his legislation says that, because it’s become the norm for corporations to comprise multiple smaller companies, adopting combined reporting would enable the state to more accurately measure business activities. It also stated that the current separate reporting system puts smaller, independent businesses at a disadvantage since they can’t pass profits off to other entities in tax havens such as Delaware, Ireland or the Cayman Islands.
The bill calls for the money raised from the change to be used to offset another business tax. The Florida Policy Institute, an Orlando research nonprofit, estimates Florida could raise $477 million annually in taxes from combined reporting.
“Combined reporting is good policy and it should not be partisan,” said Orlando Rep. Anna Eskamani, who filed combined reporting amendments in 2019 and 2020 and this year is the top Democrat on the House’s tax committee. “I’m super hopeful this is a beginning of a new era of Republican members who want to challenge the status quo instead of doing business as usual.”
If the bill passes, Florida would join 28 other states, as well as Washington, D.C., that have adopted combined reporting. And although the policy has become a party-line issue in Florida, it’s been embraced in states across the political spectrum, including red states such as Texas, Kentucky and Arizona and blue states such as California, New York and Massachusetts.
“I don’t see this as an anti-Republican position,” said Rep. Thad Altman, an Indian Harbour Beach Republican and former chair of the Senate’s tax committee who supports the bill. “Our tax structure is woefully inadequate when it comes to corporate tax. It allows for too many exemptions and most of those exemptions are helping companies not based here in Florida.”
For example, one of the most common ways corporations dodge income taxes is by transferring trademarks, patents and other intellectual property to subsidiaries in other states and then paying themselves to use them — even though the Department of Revenue says the strategy isn’t allowed.
It’s sometimes called the Geoffrey Loophole, after Toys “R” Us, which is based in New Jersey, transferred its trademarked giraffe mascot to a Delaware subsidiary so profits from it couldn’t be taxed. Records show lots of other companies employ similar tactics, including Circle K, Kraft, Microsoft, Best Buy and Whole Foods.
Florida currently gives companies the option of filing a single tax return, but according to the Department of Revenue, only 2% of corporate tax returns are filed that way.
But even with a Republican sponsor, passing the bill will be a tremendous feat because the state’s most powerful interest groups generally oppose it.
The Florida Chamber of Commerce, Associated Industries of Florida and the Florida Retail Federation, which count Disney, Darden Restaurants, Publix and Universal Orlando among their biggest donors, have long argued that moving to combined reporting won’t yield nearly as much revenue as tax-reform advocates claim and would have a “chilling effect on Florida’s friendly business climate.”
None of those groups returned requests for comment. But speaking before senators in 2019 against a similar bill, French Brown, a lobbyist for the chamber, FRF and Disney, said: “Florida’s corporate income tax law already has very clear provisions that allow the Florida Department of Revenue to reach out and re-determine and re-distribute the amount of income for corporations that they feel like might be bad actors.”
Even so, those same groups could be persuaded by a provision in the bill that says that any resulting additional revenue must be used to lower the state’s commercial rent tax, the 5.5% tax businesses pay on leases.
Florida is currently the only state that levies a commercial rent tax, which generates about $2 billion each year, and lowering it has been a top priority for business lobbyists, who argue it hurts employers. Altman was hopeful more Republicans would support combined reporting if it’s offset by another tax cut.
Michael Mazerov, a senior fellow with the progressive Center on Budget and Policy Priorities, has studied the effects of combined reporting for decades and continues to work to debunk notions that it will cripple a state’s economy. He said, on average, corporations spend just 2% to 4% of their total expenses on state and local taxes and there isn’t evidence that combined reporting has discouraged businesses from operating in states that have adopted it.
“They (large corporations) claim it will hurt the state’s economy; they claim businesses won’t invest as much in the state; they claim it’s administratively burdensome; they claim it’s unfair. They have all sorts of arguments against it, but none of them hold water,” Mazerov said. “Basically, it comes down to it makes them pay more taxes.”