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Aug. 8 — An economist warned state legislators to be wary of pitches from publicly traded companies and business interests asking for special accommodations when corporate tax codes are modified because of a “financial reporting effect.”
Michael Mazerov, a senior fellow with the progressive Center on Budget and Policy Priorities, expressed doubts Aug. 8 that state tax code modifications have an adverse impact on publicly traded companies outside of the immediate financial cost associated with potentially higher state tax expenses. He specifically referenced assertions from corporate interests that certain types of code changes could necessitate adjustments to the asset or liability balances on an income statement, triggering an impact on profitability and the company's value under U.S. generally accepted accounting principles (GAAP).
Mazerov suggested corporate interests are hoping to extract specialized treatment, suggesting states should forgo some of the revenue they would otherwise collect from their policy modifications as compensation for potentially negative market impacts.
However, speaking during a National Conference of State Legislatures program in Chicago, Mazerov said there is no reliable evidence of the so-called financial reporting effect.
“I am not aware of any evidence that such major tax changes have in fact had this negative impact in the markets,” Mazerov told members of the NCSL's Task Force on State and Local Taxation. “Yet the argument is made that the states should forgo revenue in order to ameliorate an effect in the stock market that may occur.”
Mazerov's comments came in response to a presentation by MultiState Associates Inc., a state and local lobbying and government relations services company, and NextEra Energy Inc., a $17.5 billion power company that operates the electric utility Florida Power & Light Co.
Joe Crosby, a principal with MultiState, called on members of the task force to consider the accounting standards' implications of major state tax code revisions. While most tax modifications focus on taxable income, he said there could be significant inadvertent impacts on book income under GAAP rules reportable to the Securities and Exchange Commission and shareholders.
In many cases, Crosby said these unintended changes to GAAP income may have a greater impact on the corporation than the changes occurring under state tax law. Such impacts can also deflate the share price of these publicly traded taxpayers.
“Legislatures almost never talk about the potential impact of a significant tax change on a corporation’s requirements under the SEC rules to calculate and report their book income,” Crosby said. “When you are considering significant tax reforms, it is possible in some instances that the tax reforms you are making will have a greater impact on their book income than the taxable income they are paying to the state.”
The Council On State Taxation made a similar argument recently in a policy position titled, “ Consequences of Significant Tax Law Changes on Financial Reporting.” The policy statement stressed that states must mitigate the “immediate and negative impact” of tax code changes on a company’s financial reporting.
“While it is evident that companies may experience a change in their actual tax liability as a result of some tax law changes, the financial impact of having to immediately recognize additional tax expense for financial reporting purposes is not always evident,” COST stated.
However, Mazerov said states should be skeptical of these positions and challenged Crosby and COST to provide reliable evidence that any financial reporting effect is a burden on publicly traded companies.
For example, Mazerov pointed to Massachusetts’ adoption of combined reporting in 2009, which included a possibility that some publicly traded corporations could gain a deduction on their potential deferred tax liabilities. Of the more than 1,000 publicly traded companies in the state, 133 filed applications for a protective claim. A subsequent analysis determined that if all of the deductions were allowed, they would have offset one-third of the revenue generated by the combined reporting regime.
Mazerov said Massachusetts’ revenue agency ultimately determined there was little justification for such deductions. He said few, if any, have been granted over the last seven years.
More importantly, Mazerov said the Massachusetts experience tested corporate taxpayers' assertion that there would be an impact on stock values.
“No one has presented any evidence that these companies did in fact take a hit to their stock values,” he said. “So again, you should be skeptical of this claim until there is more concrete evidence presented.”
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