Why closing the corporate tax loophole is more than a ‘fairness’ issue

by Alicia Manzano
February 15, 2012

Public opinion polls have long shown that average Americans are tired of big corporations getting away with paying little or no income tax on their mega profits. Now, from a surprising source, comes a new poll showing overwhelming distaste with the corporate exploitation of tax loopholes. The surprising source of this malcontent is the small business sector. It’s surprising because the little guys usually throw their lot in with the corporate guys, figuring what’s best for the big box is what’s best for them. Apparently, they’re starting to see things differently.

A whopping 90 percent of the small business owners surveyed nationally said that large corporations use loopholes to avoid paying taxes that the small businesses pay. They also view this as a problem, saying it harms their business.

When it comes to corporate tax loopholes, New Mexico has a doozy. What’s more, New Mexico is the only state in the western U.S. that allows multi-state corporations to have this particular advantage over its home-grown businesses. And that is shameful.

Multi-state corporations use the loophole to shelter their New Mexico profits in a state that does not collect corporate income tax (Delaware is the big favorite). Then when they file their New Mexico tax returns they can claim they simply didn’t make much here in the Land of Enchantment. Meanwhile, companies that do business only in New Mexico (hint: collectively, they are the largest employer in the state) are paying taxes on their profits.

Attempts have been made over the last several legislative sessions to close this unfair loophole—in fact Senator Peter Wirth (D-Santa Fe) has introduced such legislation (SB-9) again this year even though Governor Martinez has threatened to veto it. The Governor has said she doesn’t support closing this loophole because she doesn’t want to “pick winners and losers.” The existence of the loophole itself picks winners and losers and, sadly, the winners here are not New Mexico’s small businesses.

To be fair, Governor Richardson wasn’t supportive of closing this loophole either. Legislation to fix it has always met extreme resistance at the Roundhouse—namely in the form of corporate lobbyists who are looking out for their client’s best interests and throwing expensive parties for your lawmakers. While the executive and legislative branches have been failing us, though, the courts have been doing their job.

New Mexico’s Taxation and Revenue Department has taken a number of these corporate loophole-exploiters to court—most famously Wal-Mart—and won judgments against them. And the giants have paid up. So what’s the problem, you ask? The problem is, this is an expensive, inefficient, and time-consuming way to collect the income taxes that are rightly due to the state in the first place. And the folks at the TRD and in the courts certainly have better things to do than clean up a mess the Legislature and Governor refuse to touch.

Don’t laugh this off as some moral “fairness” issue—although it is. It’s also a very practical issue. All businesses need certain infrastructure and services in order to operate. They need roadways, an educated workforce, police and fire protection, and a court system to enforce their contracts. Since they all need this infrastructure, they should all pay for it. New Mexico’s small businesses are already at a disadvantage when it comes to competing with big corporations. They lack the buying power to get the best prices on everything from raw materials to health insurance. This loophole puts them at a further disadvantage. While they’re chipping in to keep the roads paved and the first responders at the ready, the big guys are getting a free ride. If that’s not an example of “winners and losers” then what is?

Alicia Manzano is NM Voices’ Outreach Director