Taxing problems for Mr Reagan

Press, 17 August 1983, Page 12

Taxing problems for Mr Reagan

By

SUSAN RASKY,

of Reuter, in Washington

President Reagan, caught between angry United States trading partners and financially-strapped state governments, is likely to decide within a month whether to limit the taxes states can charge multinational firms.

His dilemma arises from a recent Supreme Court ruling that a state can tax the world-wide profits of a United States multinational firm and not just what its subsidiary made in that state. Under the controversial ruling, if 10 per cent of a corporation’s worldwide business activity takes place in a state, then that state can levy its corporate income tax on 10 per cent of the firm’s worldwide profits. The tax applies even if the business unit operating in the state shows no profits from its activities there.

At present, 12 of the 50 states use this so called “unitary apportionment” tax method. The court said the tax method is legal since there are no federal laws to prohibit it.

It did not address the issue of applying the tax to foreign-owned multinational firms, as some of the 12 states do.

The ruling was hailed as a victory by state organisations which argued that without the unitary tax, their governments were at the mercy of corporate accounting strategies which, try to shuffle profits around to avoid paying taxes.

America’s major trading partners, particularly Japan and European Community countries, have protested and urged the Reagan Administration to push for federal legislation that would pre-empt state'unitary tax laws.

Britain, which unsuccessfully sought to include a provision in its' 1980 tax treaty with the United States prohibiting such state tax methods, has threatened to retaliate against United States firms doing business in Britain unless the administration acts. That threat in turn has prompted concern among some United States multinationals which have now begun to press the white House to seek legislation barring state use of the unitary tax system.

The issue is before the top economic advisers in President Reagan’s Cabinet and administration sources say a decision is expected no later than September 5.

The sources also say the decision is so highly political it is likely to be one that the President will have to take himself. The states, as well as their corporate opponents, concede that the actual amount of money at stake is relatively small — a total of about SUS7OO million (SNZIO7B million) for the 12 states at present using the unitary method, and something less than two billion dollars if all 50 states were to apply it. The lingering effects of the severe United States recession and President Reagan’s efforts to cut federal budget deficits by shifting more responsibility for social programmes to the states have taken a heavy toll on state government finances.

State officials say even a few dollars more or less in their

revenue coffers can make a big difference now in helping them maintain important programmes and services.

For America’s trading partners, the unitary tax issue is a matter of principle. Foreign governments are perplexed and irritated by what they see as a needlessly complicated United States system in which they negotiate a treaty with the federal Government calling for one type of tax arrangement and then find themselves potentially subject to differing arrangements in 50 state jurisdictions. They are equally concerned that if the present United States tax system remains, many developing nations may decide to adopt it.

The choice of which side to alienate in the dispute would be politically difficult for any president, but it is more so for President Reagan, who has made an issue of wanting to return taxing power and responsibility for programmes to the states. In fact, during his eight years as governor of California, Mr Reagan opposed congressional legislation that would have outlawed state use of the unitary tax method. Siding with the states on the issue could have equally unpleasant repercussions for the administration in its already strained trade relations with western allies. President Reagan’s efforts to extend United states export control rules and anti-monopoly laws to foreign firms, and his recent decision to impose quotas and tariffs on high-grfide steel imports

to the United States, have enraged western trading partners. American business groups say failure by President Reagan to come up with legislation addressing the unitary tax issue would be seen by United States allies as just another sign that the administration is insensitive to the concerns of its allies.

Britain has already complained because the administration did not file a legal brief with the Supreme Court supporting the United States firm that challenged California’s unitary tax law. Administration sources said no brief was filed because the federal Government felt its views were already on record in a related unitary tax case pending before the High Court. United States business groups say that the Administration was reluctant to take too visible a role in the case for fear of antagonising the states. They argue that a Government filing might have made a difference in the court’s decision, an argument that administration sources reject. Advocates on both sides of the issue say it is unclear how the court will rule if and when it receives a case on applying the worldwide unitary tax method to foreign multinationals with United States subsidiaries.

Meanwhile, legislation is pending in congress to outlaw this taxing method by the states. Business groups that favour the legislation say its chances of passage are doubtful without strong backing from the White House. V