Both Governor Culver and former Governor Vilsack have proposed in the past that the state change the way it calculates corporate income tax to a manner that they project would increase state revenues. This change is known as combined corporate reporting. To the average Iowan, this sounds like something that doesn’t impact them. But implementation of this tax structure could have a dramatic impact on Iowa’s economy and its future

What is combined reporting?
Combined or unitary corporate income tax reporting requires a corporation with any reporting requirement in Iowa to combine all its subsidiaries that are deemed unitary and file an Iowa return based upon an apportioned allocation of tax liability to Iowa.

Or more simply put, combined reporting requires an Iowa-based company to combine all its activities inside and outside of Iowa and pay income tax based on that amount. For a company based outside Iowa but operating in the state, all its profits would be combined before determining its Iowa tax liability.

How is this different from Iowa’s current law?
Iowa corporations currently use separate entity reporting, allowing Iowa franchise or income tax to apply to each separate corporation doing business in the state. These separate entities must file separate tax returns reporting net income.

Have other states enacted Combined Corporate Reporting? Currently, twenty-one states require combined reporting. Of Iowa’s border states, Illinois, Minnesota, and Nebraska require combined reporting. Several states have enacted this but then repealed it, like Florida did in the 1980’s and Connecticut which had it in effect for less than one day before the Legislature changed its mind.

Who could be affected by this?
Any Iowa company that has operations outside the state would potentially pay more in corporate income taxes. This would include companies like Pella Windows, Vermeer Manufacturing, and Hon Industries. Out of state companies with Iowa operations would also be subjected to higher taxes from the state. Some affected companies in this class include some of Iowa’s largest employers – John Deere, Alliant Energy, Pioneer, Monsanto, Lennox, 3M, and Fisher Controls.

How much more tax would supposedly be raised by switching to combined corporate reporting?
When Governor Vilsack first proposed this change, he projected that the state would receive an additional $25 million in revenue. Last session, Governor Culver raised this projection to $75 million in revenue.

Why Combined Reporting is Bad for Iowa:

• Corporate tax managers generally consider combined reporting a negative factor when evaluating states for new or expanded activity.
• This tax increase would further stall economic development in Iowa. Tax increases slow productivity increases that lead to economic growth.
• In national surveys of manufacturers, Forty-one percent reported that they would seek to lower their state and local tax burden when expanding or relocating a facility. (Grant Thornton Survey of American Manufacturers, 1998).
• Combined reporting runs counter to the principle of simplicity. The definition of a unitary business is a subjective determination.
• For small to medium sized businesses, a move to combined reporting creates a costly administrative burden in order to comply with the complexities of the system.
• Determining what part of a business is subject to tax under combined corporate reporting is an arbitrary and subjective process. Bureaucratic decisions against businesses in this serve as a strong negative factor for those businesses, which in turn can result in fewer jobs being created or businesses leaving a state.

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