The Treasury Department yesterday put pressure on a handful of states to eliminate the way they collect taxes on multinational corporations by drafting legislation that would give them an incentive to do so.
Last year, then-secretary of the Treasury Donald T. Regan warned 12 states that if they failed to change the way they taxed multinational corporations, he would propose federal legislation to do so. Since then, five states have reversed their laws and the California legislature is still debating the issue, a Treasury Department spokesman said.
Under the unitary tax concept, a state collects taxes from a corporation based on a formula that takes into account the corporation's worldwide earnings, not just its earnings in that state.
Major multinational corporations as well as U.S. trading partners have opposed the tax method, claiming it results in double taxation.
The Treasury legislation would require certain corporations to file annual information returns with the Internal Revenue Service concerning how they compute the taxes they pay in various states, Treasury officials said. The federal government would then share this and other taxpayer information with the states that do not follow the worldwide method of taxation, providing an incentive for states to change their laws, Treasury officials said.
Officials in the states that have adopted the unitary taxation method said that the system was needed to counter moves by corporations to shift earnings accounts abroad, minimizing the taxes paid to individual states.
Regan's warnings came after months of meetings with a committee of federal, state and corporate officials who studied the unitary method of taxation.
The group reached a consensus that states should limit taxing authority to the "waters's edge," meaning domestic operations.
Regan said last year that "if there are not sufficient signs of appreciable progress by states in this area by July 31, 1985, whether by legislation or administrative action, I will recommend that the administration propose federal legislation that would give affect to a water's-edge limitation patterned after that in the chairman's report."
The legislation proposed yesterday would be patterned after the commission's report, Treasury said.
The states that have not done away with the unitary tax method are Alaska, New Hampshire, Idaho, Montana, North Dakota, and Utah, a Treasury official said.
Treasury is receiving comments on the draft legislation until Aug. 15 and then it hopes to send legislation to Capitol Hill.