On Tuesday, January 29, the Senate Taxation committee will hear a bill that seeks to make our corporate income tax system fairer for the small businesses lining the Main Streets of all of our communities. Senate Bill 141, proposes eliminating the water’s edge election for corporate income tax purposes in Montana.
In Montana, corporations are required to use combined filing to file their corporate income taxes. Combined filing means that a corporation must include all of their subsidiaries’ (or daughter companies’) income on their tax return. The corporation is taxed on the portion of that total income that is related to operations or profits connected to Montana.
Decades ago, states put in place the water’s edge election to allow multinational corporations to calculate total income using only their U.S. based income. In return these corporations pay a slightly higher tax rate of 7 percent on that income (compared to 6.75 percent).
Since the water’s edge election was put in place, shifting profits overseas has grown dramatically in recent years, and the use of Montana’s water’s edge election is evidence of that. In 2016, out of the over 16,000 corporations that filed taxes in Montana, 487 corporations benefitted from the water’s edge giveaway. The number of corporations filing water’s edge has more than doubled since 2009 when 221 corporations claimed the water’s edge election. In fact, corporations are expected to continue shifting $235 billion annually overseas post-federal tax reform.
The water’s edge election puts Montana’s small businesses – that do not have the luxury of overseas subsidiaries – at a disadvantage compared to multinational corporations that can shift their profits overseas. The Montana Legislature has some work to do to even the playing field for our small businesses. Eliminating the water’s edge election would give Montana’s Main Street businesses a better chance to compete against multinational corporations.
MBPC is a nonprofit organization focused on providing credible and timely research and analysis on budget, tax, and economic issues that impact low- and moderate-income Montana families.