The revenue losses are huge. According to an analysis by the Institute on Taxation and Economic Policy, the 252 largest and most profitable American corporations collectively avoided $41.7 billion in state income taxes between 2001 and 2003. More than a quarter of the companies managed to pay no state corporate taxes during at least one of the years in question.
This year, New York and West Virginia passed legislation to stanch those losses. They mandated the use of combined reporting. Under it, parent companies and subsidiaries are required to report their nationwide profits. They are then taxed on a share of profits based on their level of activity in the state.
The move to combined reporting is not new--18 states already have such mandates--but it is gathering steam. The governors of Iowa, Massachusetts, Michigan, North Carolina and Pennsylvania have asked their legislatures to implement the reform.
Many of the states that use combined reporting estimate increased tax receipts of 10 to 25 percent. "It wouldn't surprise me if those turn out to be conservative," says Michael Mazerov, the author of a recent study on the topic for the Center for Budget and Policy Priorities.
Other states are dealing with evasive accounting practices on a loophole-by-loophole basis. But these maneuvers, Mazerov points out, may be on shakier legal ground. "The most significant advantage of combined reporting," he says, "is that it has been upheld by the courts."