North Carolina judge provides hope for Wisconsin's taxpayers

A North Carolina state judge’s ruling against a Wal-Mart tax avoidance scheme provides hope for Wisconsin’s beleaguered taxpayers who have seen their taxes increase as corporate taxes have decreased.

Wal-Mart is one of the world’s most profitable corporations, generating $315 billion in revenue and $11.2 billion in profits in 2006.

Yet in North Carolina, Wal-Mart transferred ownership of its stores to various in-house real-estate investment trusts (REITS), and then cut its taxes by taking deductions for rent payments that never left the company.

In a judgment signed on December 31, Emergency Special Judge of Superior Court Clarence Horton Jr. ruled "there is no evidence that the rent transaction, taken as a whole, has any real economic substance," other than for cutting Wal-Mart's taxes. "It is particularly difficult for the court to conclude that rents were actually 'paid' when they subsequently returned to the payor corporation," the judge ruled.

The judge dismissed the giant retailer's suit, which sought a refund of the $33.5 million in taxes, interest and penalties.

Wal-Mart, like other corporations doing business in the Wisconsin, manipulates the tax code to avoid paying taxes using REITS and Passive Investment Corporations (PICs). Both are little more than accounting gimmicks that turn taxable profits into operating costs, often reducing taxable income to zero. These companies are gaming the system at the taxpaying public’s expense.

It’s not as if Wisconsin’s business taxes are high. Forward Wisconsin, the state’s public private marketing and business recruitment agency, brags that: “Wisconsin business taxes are low - lower than those in 35 other states..." and " Wisconsin's business-friendly attitude is reflected in positive business tax changes that have been made in every biennial legislative session since the early 1970s. "

The Accounting firm, Ernst & Young, reports that the corporate share of state and local taxes in Wisconsin is among the 10 lowest in the country.

Nonetheless,corporations avoided $643 million in Wisconsin income taxes in 2006, according to a recent study in the tax journal, State Tax Notes. The Institute of Wisconsin’s Future reports that Microsoft, the computer behemoth that made $12 billion in profits in 2005, didn't pay a penny of Wisconsin corporate income tax. Nor did Merck, the pharmaceutical giant with $5 billion in 2005 profits. Nor Sears, whose retail family includes Kmart and Lands' End, which made $1 billion in 2005 profits.

Since 1978 Wisconsin’s corporations' real (inflation adjusted) profits have doubled, while real tax contributions have actually declined slightly. As a result, the share of state revenue contributed by corporations has fallen dramatically:

1979-10%

1989-7%

2000 4.6%

2006 3.5%

Corporate tax avoidance schemes have contributed to shifting the tax burden onto homeowners and Wisconsin’s working families.

As corporate tax contributions have declined, state government has reduced its support for the University of Wisconsin system, technical colleges and local governments. Services have been cut and residential property taxes, tuition and fees have increased.

Milwaukee's state aid has declined from 45% of the city’s budget in 1998 to 34% in 2006. To compensate residential property taxes have increased from 12% to 17% and non property tax revenue such as parking ticket fees and street parking permits from 21% to 30%.

MATC, the state’s flagship technical college, has seen its state aid decline from over 30% in 1990 to 14% in 2007. Students now contribute more to our technical colleges through their tuition and fees than the state does.

Corporations that use accounting gimmicks to avoid paying their taxes are shifting the burden of financing local government and educational services to homeowners, students, and other citizens. They are classic free riders, benefiting from these public goods, but refusing to pay their fair share.

Wisconsin's billion dollar plus structural deficit is, in part, the result of these tax avoidance schemes.

In response, state Senator Dave Hansen (D-Green Bay) has introduced the Corporate Tax Accountability Act (SB367) which would require publicly-held corporations to report their profits and tax contributions to the state. The legislation will affect less than 1% of Wisconsin’s companies, primarily large multi-state businesses like Wal-Mart and Merck.

Co-sponsors include nine senators and nineteen assembly representatives. Assembly Representative Phil Garthwaite (D-Dickeyville) plans to introduce an Assembly version.

This legislation will provide legislators with important information if they are to provide Wisconsin’s beleaguered taxpayers with real tax relief.

Wal-Mart has announced that it hasn't decided on how it will proceed in the aftermath of the North Carolina ruling, and declined to comment on the case's specifics due to a possible appeal. It continues to use REITS in Wisconsin.