Richard Pomp has drafted tax codes in China, Zambia, Vietnam and Gambia.
One lesson he learned as an academic consultant is that it’s a good idea to get the business community invested in the new tax rules. Another lesson is that a smaller country’s taxing powers more closely parallels the circumstances in a state like Connecticut than in a big country like the United States.
A developing country “can’t control its environment, [is] really at the mercy of forces outside of its control, [is] outgunned and outmanned” by the law firms and accounting firms hired by global corporations, said Pomp, a professor at the University of Connecticut School of Law.
Because a state government faces similar challenges, Pomp decided to parlay his international tax work into studies of state taxation. He was interested in how state governments with their modest powers figure out how to fairly tax businesses that operate in their jurisdiction and in many others as well.
The professor’s expertise in state taxation has proved useful as he spent 383 hours on a pro bono project as the hearing officer for the Multistate Tax Commission on proposed changes to the Multistate Tax Compact. The compact was developed after the U.S. Supreme Court ruled that states could tax interstate commerce through state income taxes. The commission is the administrative arm of the compact.
It was a national, non-partisan association known as the Uniform Law Commission that first came up with a way to fairly divide the taxable income for multistate corporations among the states in which those corporations do business. That model law, the Uniform Division of Income for Tax Purposes Act, was developed in 1957.
According to Pomp, the act provided the states with a fair way to tax multistate corporations by using a formula based on what percentage of its property, payroll dollars and sales totals that a corporation has within any single state’s borders. (Connecticut never bought into the act, Pomp said. Instead, it bases its taxes on a single factor—the percentage of a company’s sales that come from Connecticut.)
However, Pomp said, the taxing model has become antiquated over the last half century, with the economic shift away from manufacturing and toward service industries, as well as the development of the Internet and the digitalization of what used to be tangible property.
As a result, many states have moved away from the Uniform Division of Income for Tax Purposes Act, and have adopted their own tax-computing formulas, often for the purpose of economic development and attracting business to their states. “As the economy gets more complicated, everyone realizes that this model act that goes back to 1957 is hardly a model anymore,” Pomp says.
When the Uniform Law Commission decided against updating the model law, the Multistate Tax Commission decided to step into the breach. Pomp’s report to the commission suggests changing the formula for taxing multistate businesses by allowing each state to weigh the factors of sales, payroll and property however it chooses. He does, however, suggest giving the percentage of sales a company has in a state twice the weight of the other factors.
The Multistate Tax Commission’s executive committee is slated to debate Pomp’s report on Dec. 12. Pomp said he hopes that some of his suggestions will provide food for thought even though he proposed changes to the commission’s own recommendations. Shirley Sicilian, general counsel for the Multistate Tax Commission, said during a recent press conference on Pomp’s report that the goal of the model revisions is to provide something for state legislatures to draw on as they modernize their own tax laws.
Updating the Uniform Division of Income for Tax Purposes Act could revamp the entire state tax landscape, but the business community has the political wherewithal to stop tax reform if it wants to do so, Pomp said.
Taxes involve the “distribution of wealth and power in the country,” Pomp said. If a smaller part of a state budget is contributed by corporations, more must be provided from other taxpayers, he said.
The UConn professor added that his studies show that state tax policy does not tend to affect where businesses locate. More important factors, he said, are where business leaders went to school, where their families live, the weather or amenities in a specific community.
Changing tax formulas to attract businesses from one state to another state is “like shifting the deck chairs on the Titanic. We ought to be working more cooperatively against competition” from abroad, Pomp said. “We’re fighting in the playground against ourselves while the real threat is out there.”