As Congress awaits a new tax bill next year, two major interest groups--state tax officials and multinational companies--are already jockeying over legislation that would significantly alter the way a number of states impose corporate income taxes.
At stake is between $70 million and $700 million, depending on whose estimate is used, all centering around a complex debate over the methods used by states to calculate the tax liabilities of foreign-based companies and domestic firms with foreign affiliates.
Legislation restricting state practices has been introduced on both sides of Congress, and in the House it has the backing of a majority of the Ways and Means Committee.
In the politics of taxation, however, most participants do not believe the legislation can get through Congress on its own. Instead, it is felt, it would need to be attached to a larger tax bill, such as the proposal to raise revenues the Reagan administration is expected to introduce next year.
The states, prodded largely by California, which would lose far more than any other if the legislation were to pass, have mounted a counterattack, attempting to turn the issue into a question of states rights versus an intrusive federal government, with the strong suggestion that the legislation violates President Reagan's call for a new federalism.
They have, in fact, come up with a 1967 letter written by then-California Gov. Reagan to a member of Congress concerning similar legislation in which Reagan said: "Federal intervention in state tax matters is objectionable on principle."
A factor making the debate more intense is the concern among multinational corporations that more states, facing reductions in federal aid and lost tax revenues, will turn to the system of taxation the companies oppose.
The two tactics used by some states that the legislation would attack are:
* Instead of taking the income of a company operating within a state to calculate its tax liability, the state calculates the world-wide sales, payroll and capital investments of the firm and its affiliates. The tax is then based on the percentage of these three factors that occur within the state's boundary.
* In calculating the tax liability of a domestic-based multinational corporation, the state includes the dividends paid by foreign affiliates.
James Rosapepe, of the Multistate Tax Commission, a leading opponent of the restrictive legislation, contends that states need to use these methods to prevent corporations from shielding taxable income by shifting profits to affiliates in low-tax nations while claiming losses within U.S. borders.
Marlow W. Cook, who represents BAT Industries, Ltd., a British firm that owns Saks Fifth Avenue, Gimbel's and Brown and William son Tobacco Corp., has countered in a letter to the Treasury that the complex formula of sales, payroll and capital investment "presents serious problems of very different systems of accounting, languages, currencies, levels of productivity, cost of labor, cost of materials and elements of risk.
"The obvious differences in property and labor costs worldwide builds and instant unbalance," he wrote. Cook dismissed the argument that restricting state taxation procedures violates states rights, contending that "our federal system does not contemplate complete anarchy when it comes to taxation of international business."
Along with the accounting problems, advocates of the legislation also contend that the use of worldwide taxation acts as a major irritant to foreign countries seeking to invest in the United States. These practices have "caused serious international trade problems in the case of foreign-based corporations with U.S. subsidiaries," Sen. Charles McC. Mathias Jr. (R-Md.), the key Senate sponsor, said. The principal House sponsors are Reps. Barber B. Conable Jr. (R-N.Y.) and James R. Jones (D-Okla.). Another proponent of the legislation, William R. Brown, president of the Council of State Chambers of Commerce, argues that taxing on the basis of overseas profits by corporate affiliates is unfair because many multinational corporations invest abroad on the assumption of high profit rates to compensate for higher political risks. Thus, taxing the income at state rates based on U.S. profit levels is unfair, he said.
The chamber organization contends that, on the basis of a survey of its members, the revenue losses to the states if the legislation were passed would be only $76 million annually.
The Multistate Tax Commission, however, estimates the total loss at $709.5 million, based on a survey of state tax officials. By far the biggest loser, according to the commission, would be California, where it said revenues would drop by $485 million, more than half the total.
Other major revenue drops would be experienced by Colorado, $7.5 million; Idaho, $16 million; Illinois, $25 million; New York, $75 million; Oklahoma, $12.1 million; Oregon, $20 million; Utah, $28.5 million, and Wisconsin, $5 million, according to the commission analysis.
New York, for example, recently shifted to worldwide calculation of tax liabilities only for oil companies. Officials there estimate that income tax revenues from the companies will jump, as a consequence, from $30 million to about $105 million.
Frank Mauro, a legislative aide who worked on the New York bill, contended that oil companies had as many as 400 separate corporations, making it impossible to calculate tax liabilities in New York alone using traditional methods based on earnings reported by the corporations active within the state.
Similarly, Paul Hanlon, acting tax commissioner for Vermont, said the state's insistence on using a formula recognizing Mobil Corp.'s foreign affiliate dividends resulted in raising the firm's state tax liability over three years from about $1,850 to $75,000.
Locally, the commission said Virginia would experience no revenue losses, Maryland would lose $420,000 and the District would lose $52,000.