Tax And Budget News

CALPIRG Urges Governor Schwarzenegger to Sign Bill to Increase Transparency in Corporate Taxes

SACRAMENTO—Today CALPIRG released a new white paper entitled Sunshine for California: Shining Light on Corporate Tax Secrecy for Healthier State Budgets, Investments, and Markets. The white paper highlights the most common corporate tax abuses and calls for increased transparency in corporate tax returns, particularly with regards to the large gap between the profits companies report to tax authorities and their own shareholders.

The white paper comes at a time when Governor Schwarzenegger will likely soon need to decide whether to sign a bill, AB 675 (Klehs), which would require large corporations to provide more detailed information to the Franchise Tax Board about the differences between reported book and tax income. AB 675 passed out of the Senate yesterday and is headed to the Assembly for concurrence.

“The gubernatorial candidates may disagree on some tax policies, but they should both agree that corporations should not be allowed to hide profits from the California tax board,” said Emily Rusch, Tax and Budget Advocate for CALPIRG.

The Internal Revenue Service began requiring large corporations to submit more detailed information about differences between book income and tax income, but states like California have yet to follow their lead. The Franchise Tax Board has characterized book-tax reconciliation as “a significant audit tool” that “could assist auditors in identifying tax shelter activity and dissuade some taxpayers from entering into tax avoidance schemes.” More accurate indicators of tax evasion will also spare law-abiding corporations from the hassle of unnecessary audits.

“We strongly urge the Governor to support transparency in corporate taxes and sign AB 675. Investors and taxpayers will both benefit from fair, honest, and effective corporate tax reporting,” concluded Rusch.

The CALPIRG white paper compiles research findings from the Franchise Tax Board, the Internal Revenue Service, HarvardUniversity, the federal Government Accountability Office and other independent and academic sources. Among the findings of the white paper:

• Corporate tax avoidance is a rampant problem, with over half of profitable corporations in California paying no more than the state’s $800 minimum franchise tax in 2001. Corporations are underreporting profits, hiding profits across state lines and shifting income across companies.
  
• One way corporations avoid taxes is by underreporting profits to the California tax authorities while reporting much higher profits to shareholders. Unlike the IRS, CaliforniaCalifornia state budget if they paid taxes on the income they report to shareholders.
  does not currently require companies to fully explain these differences. The Franchise Tax Board calculates that corporations would contribute an additional $1 billion to $1.5 billion a year to the
• Numerous studies show that investors benefit when tax avoidance is more difficult. A study by NYU of 3,000 corporations over 3 decades found that firms with smaller gaps between book and tax income had stronger-than-average growth in accounting profits, while firms with the biggest gap tended to see their profits deteriorate dramatically.
  
• Markets also benefit with corporate tax transparency. A recent Harvard study found that countries with greater mandatory disclosure of financial information have stronger stock market performance.