South Dakota, Utah Join Rush for Exits at Multistate Tax Commission

South Dakota, Utah Join Rush for Exits at Multistate Tax Commission
March 6, 2013

South Dakota Gov. Dennis Daugaard (R) has signed legislation withdrawing his state from the Multistate Tax Commission (MTC). South Dakota's move follows similar legislation signed by California Gov. Jerry Brown (D) on June 28, 2012 (S.B. 1015), and precedes a bill (S.B. 247) rapidly advancing through the Utah Legislature to do the same.

What is the MTC and why are some of their state members starting to race for the exits?

The MTC was founded in 1967 as part of the Multistate Tax Compact. It was created after Congress became irritated at the utter mess of conflicting and complex rules for interstate business taxation, and threatened to impose a modest basic framework: one standard apportionment formula that all states had to use in divvying up corporate profits for taxation. Fearful that this was the camel's nose into the tent, states set up the MTC to hammer out a self-enforcing rule on their own without Congress's interference.

But not for long: today, as the MTC itself admits, “39 of the 47 states with a corporate income tax” have abandoned this original uniform formula. States, pressured by in-state businesses, have modified their tax rules to measure taxes owed by sales in a state rather than property or employees, as had been done in the past.

Long Drift From Uniformity

Despite eager MTC efforts to draft model legislation and set up working committees on important state tax issues -- controversial as the MTC's voting membership consists only of state tax officials -- state tax systems have continued to move farther and farther away from tax base and regulatory uniformity.

That may mean the MTC isn't effective at its mission, but that isn't usually enough reason for states to start leaving. That came about after one company dusted off its copy of the MTC compact and found that it gives taxpayers in MTC member states the option to use the old uniform apportionment formula rather than whatever formula might be in state law. California is an MTC member state, and the Gillette Company says it wants to use that old uniform formula even though it’s not authorized by state law. The courts agreed with Gillette, and to prevent other companies from invoking the provision, California left.

MTC's brief in the case did a disservice to its important mission, contorting itself to downplay the importance of uniformity and the relevance of language in its own founding document. The brief dangerously argued that compacts need not be adhered to by states in full, provoking other multistate compacts to warn that states do not have the power to unilaterally change the terms of a compact.

NCSL, MTC At Odds

The MTC has also gotten into a war of letters with the National Conference of State Legislatures (NCSL), which is critical of the insular nature of MTC decision-making.

Whether the MTC changes itself to survive or dies out (a two-day meeting later this month will consider watering down uniformity requirements in the Compact), some effort to bring about simplification and uniformity is essential. State tax officials are unlikely to lead such an effort, because despite any lip service to the concept, they shirk from it whenever it means actual changes to how a state does things. With state tax officials clamoring for more authority to tax interstate business income and sales, Congressionally-mandated simplification efforts (and not just vague state-enforced promises of uniformity) need to be a part of the mix.

Joseph Henchman (jdh@taxfoundation.org) is Vice President, Legal & State Projects, at the Tax Foundation. Reprinted with permission from the Tax Foundation’s Tax Policy Blog.