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Mississippi companies penalized by existing law

Legislators urged to update corporate income tax formula

JACKSON – Lawmakers are being asked to change the way corporate income tax is structured in Mississippi, a change that could encourage companies to locate in state and would relieve the tax burden on in-state companies, proponents say.

“Mississippi is one of the few states still basing its corporate income tax structure heavily on plant and payroll investments,” said Mark

Leggett, director of governmental affairs for Mississippi Manufacturers Association, an 1,800-member association. “Most other states now base their corporate income tax on formulas that use the companies’ sales in the state.”

When calculating corporate income tax, Mississippi still uses a three-factor formula based on equal shares of plant, payroll and sales. Before 1991, most states followed the same formula. Since then, 19 states have changed laws to give heavier weight to sales or another method to encourage investment within their boundaries. California made the change after lawmakers realized that “two-thirds of the tax burden was on in-state companies,” said Leggett.

Soon after Georgia changed its law from a three-factor formula to a four-factor formula, Georgia State Representative Ronnie Culbreth said at the time that “this is the way to give something back to people who chose to make investments in people and plants in this state.”

“With the four-factor formula, or also known as the double weighted sales formula, plant and payroll account for half, and sales accounts for the other half,” said Leggett. “The four-factor formula helps recruiters with economic development organizations attract new business and industry to the state because corporations don’t want to be taxed for essentially making an investment in the state.”

As a result of the formula change, multi-state manufacturers like Nissan, once it begins production, and others who have invested heavily in plants and payroll in Mississippi but do not derive a large percentage of sales in state, would benefit from lower taxes. Multi-state manufacturers that sell in Mississippi and take more money out of the state than they invest would see their tax bill increase.

Rep. Tom Cameron III (I-Greenville), who authored and introduced House Bill 275 earlier this month, which would revise the method of determining corporate income tax to the double weighted sales formula, said the bill has “a lot of support.”

“If it gets out on the floor, I have no doubt it will pass,” he said. “The only thing is, you’re pulling code sections forward. There’s a lot of fear that other things could be put into them, so there’s a reluctance to pull those code sections out on the floor.”

Cameron said he didn’t think the state would lose money if the change were approved.

“It would be the same tax except more weight would go to sales,” he said. “So out- of-state companies would pay more taxes. Outside industries are already used to doing business this way in their home states.”

The Mississippi State Tax Commission has estimated that changing the income tax apportionment formula to the double weighted sales formula would reflect a $5- million loss to the general fund at a time when the Joint Legislative Budget Committee has already slashed state agency budgets because of a revenue slowdown.

“While there are no guarantees, this minimal loss could be more than offset by the increased investment in Mississippi,” said Leggett. “Some other states, such as Georgia, have reported the change was revenue neutral. In New Jersey, lawmakers saw the $15-million loss was worth the $200-million increase in investment as a good trade off.”

The bill would give manufacturers selling primarily at wholesale the same apportionment treatment that Mississippi already provides for the manufacturers that sell primarily at retail, said David W. Stevens, senior manager of the state/local tax section at KPMG LLP in Jackson.

“In the current apportionment method, a multi-state manufacturer that sells primarily at wholesale would attract a larger burden simply because it has a manufacturing plant or headquarters in the state,” he said. “On the other hand, to the extent a company’s payroll and property factors are less than their sales factor, the proposed bill would create an increased tax burden.”

For the average state, reducing the payroll weight from one-third to one-quarter increases manufacturing employment around 3%, and the result is highly robust, according to a National Bureau of Economic Research working paper entitled “Coveting Thy Neighbor’s Manufacturing: The Dilemma of State Income Apportionment.”

“State legislatures and their constituents seem to understand this and have actively attempted to modify their states’ apportionment formulae to stimulate employment and investment,” the paper read.

Mina Jones, chief financial officer of Steel Services in Flowood, said she supports legislation proposing the double-weighted sales formula.

“Right now, in-state manufacturers like us are being punished,” she said. “We are paying 100% on everything — property taxes, employment taxes and sales. Income tax is the only thing that manufacturers who just sell in state are paying.”

Contact MBJ contributing writer Lynne Wilbanks Jeter at lwjeter@yahoo.com or (601) 853-3967.

About Lynne W. Jeter

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