The recent revelation by Milwaukee-based Harley Davidson Inc. that it needs to reduce costs at its Wisconsin operations by $54 million a year has sparked an intense debate about the state’s combined reporting law.
‘The Hog Tax’
Created in 2009, Wisconsin’s combined reporting law requires corporations to combine the income of all of their subsidiaries and operations, including those from out of state, for state corporate tax payment consideration.
About 15 percent of the state’s businesses are affected by combined reporting, said state Department of Revenue Secretary Roger Ervin.
“Mainly larger companies that have multi-state businesses,” he said.
Harley-Davidson is one of those companies. As a result of the new combined reporting tax law, Harley reported a one-time charge of $22.5 million for the first quarter of 2009, company spokesman Bob Klein said.
Conservatives and Republicans in the state have seized on that fact, saying the “Hog tax” demonstrates that state government, currently controlled by Democrats in the Legislature and the governor’s office, is making it more difficult for Wisconsin to attract and retain businesses.
State Rep. Leah Vukhmir (R-Wauwatosa), who is running for state Senate, called for a special session of the legislature to repeal combined reporting.
“I believe we have to act now so Harley doesn’t leave the state,” she said. “(Combined reporting) is not the sole source of Harley’s problems, but it is certainly something the state could do to make a difference. We have an opportunity to save jobs.”
Bigger than the Hog
Harley is not the only company affected by the combined reporting law.
In the second quarter of 2009, Milwaukee-based Rockwell Automation Inc. took a $2.4 million charge as a result of combined reporting, said company spokesman John Bernaden.
Brown Deer-based Bank Mutual Corp. saw its effective tax rate increase by 6.1 percent as a result of the combined reporting law, said chief financial officer Michael Dosland.
Based on the company’s 2009 pre-tax earnings, which were down as a result of the Great Recession, combined reporting increased Bank Mutual’s annual tax payments by $1.1 million. The impact will be even higher as the economy recovers and the company’s earnings return to normal levels, Dosland said. For example, the firm’s taxes would have been up $1.5 million from combined reporting, based on its 2008 pre-tax earnings.
Bank Mutual did receive a $1.8 million one-time tax benefit in the first quarter of 2009 as a result of combined reporting, because it was able to realize the tax benefits of some losses earlier than expected, Dosland said. “We would have realized that benefit eventually,” he said.
Issue of fairness
Supporters of combined reporting say it eliminates a loophole that allowed businesses to use out-of-state subsidiaries to avoid paying Wisconsin taxes.
“For Wisconsin to truly be business-friendly, it must also uphold tax fairness – which is why combined reporting was important to us,” said Assembly Speaker Mike Sheridan (D-Janesville). “Now, corporations can’t use lawyers’ loopholes to shift their tax burden on the backs of entrepreneurs, small companies – and Wisconsin families. Closing corporate tax loopholes has created a level, fair playing field for businesses of all sizes in Wisconsin – and is helping to set the state on a path to a stronger economic future.”
According to the Minneapolis-based New Rules Project, several U.S. retail chains, including Menomonee Falls-based Kohl’s Corp., have used accounting schemes to avoid paying state taxes. States with combined reporting are not vulnerable to such accounting schemes, according to the New Rules Project. A spokesperson for Kohl’s could not be reached for comment.
Prior to the combined reporting law, the state had problems collecting tax revenue from companies with out-of-state operations, Ervin said.
“I don’t ever like to use the word loophole,” he said. “Businesses were taking advantage of their interpretation of the law. We were in constant litigation with companies over these types of activities. That really is a waste of resources. Since we’ve created the law, we are at the lowest level of litigation in the pipeline ever for this department.”
The previous tax environment was unfair to small companies in the state that could not take advantage of using out-of-state operations to lower their Wisconsin tax burden, Ervin said.
Democrats say that Republican criticism of combined reporting is an overblown complaint about the state’s tax and business climate.
“Since we passed this law, we have not had one single company call us and say this is a problem,” said Ervin, who was appointed by Democratic Gov. Jim Doyle.
Democrats point out that Wisconsin’s state and local tax ranking has dropped to its lowest level since 1961, according to an annual report by the state Department of Revenue. The report on Wisconsin state and local government tax rankings shows that Wisconsin ranks 15th among the states as measured by taxes per $1,000 of personal income and ranks 21st on a per capita basis. In addition, a recently released Ernst and Young study prepared for the Council on State Taxation shows Wisconsin’s business tax ranking now ranks 30th – well below the national average.
“Wisconsin is doing pretty well when it comes to taxes on small business and working families,” said Graeme Zielinski, spokesman for the Wisconsin Democratic Party. “The big picture has to be viewed. It’s not an accurate picture that Republicans are painting.”
Despite the $22.5 million hit that Harley took from the combined reporting law, Klein said, “We really haven’t taken a public stance on combined reporting. Of course, we are always interested in taxation and in Wisconsin having a good business climate.”
Harley’s problems in Wisconsin are from internal operations, Klein stressed. The two largest problems with the company’s Wisconsin operations are high labor costs and flexibility issues, because motorcycle sales are seasonal but production levels are steady throughout the year.
“We have significant gaps in the competitiveness of our Wisconsin operations,” Klein said. “We need to address the cost competitiveness of those operations. This is primarily an internal issue. We’ve been in Wisconsin for 107 years. As we look to the future, it’s our preference that we address our operational issues so we can remain in Wisconsin.”
Doyle said that statement demonstrates that combined reporting is not a threat to Harley’s future in Wisconsin. He dismissed claims by Republican legislators that combined reporting is a factor in Harley’s troubles.
“Harley never says that,” Doyle said. “(Combined reporting) has nothing to do with it.”
Representatives for some companies with significant out-of-state operations said combined reporting has had little impact on their companies.
Most business executives contacted by BizTimes Milwaukee were hesitant to criticize the state’s combined reporting law.
“(Marcus Corp. chief financial officer) Doug Neis said the financial impact isn’t significant at this point for the company and he really doesn’t want to discuss the company’s tax situation any further than that,” said Marcus spokeswoman Jessica Vollrath.
“It really has no impact on A.O. Smith (Corp.),” said Chuck Wright, spokesman for the Milwaukee-based company. “When you add the pluses and the minuses, it really has no impact.”
“I spoke with our CEO and CFO, and they don’t have any comments on this matter,” said Tiffany Weigand, spokeswoman for Milwaukee-based Rite-Hite Holding Corp. “They said they weren’t aware of a major affect to the business on this issue.”
Green Bay-based Schneider National Inc. opposed the combined reporting law because the company was concerned about how it would affect the state’s economy, said general counsel Tom Vandenberg. However, the company has not been affected by the law, he said.
Glendale-based Johnson Controls Inc. spokeswoman Anna Timms said, “The law change will have an immaterial effect given Johnson Controls’ current operating income and footprint in Wisconsin.”
“(Combined reporting) really doesn’t impact us,” said Jean Towell, spokeswoman for Milwaukee-based Northwestern Mutual Life Insurance Co.
Some other companies with multi-state operations either declined to comment for this story.
A spokesperson for one Wisconsin-based company with significant operations outside of the state declined to comment on the record for this story because the company has received assistance from the state. “Obviously there is a financial impact to us (from combined reporting),” the spokesperson said.
“A lot of companies have not been eager to say they have been harmed by (combined reporting) because they don’t want to show weakness and they don’t want to make political enemies,” said Steve Baas, governmental affairs director of the Metropolitan Milwaukee Association of Commerce (MMAC).
Although most businesses in the state are not affected by combined reporting, the companies that are hurt by the law are, like Harley-Davidson and Rockwell Automation, some of the most important companies in the state that help to grow the state’s economy by bringing in revenue from outside of the state, Baas said.
“The companies that (combined reporting) hits are the kind of companies that the economy needs the most,” Baas said.
The Great Recession may have lessened the initial impact of the combined reporting law, said James Buchen, vice president of government relations for Wisconsin Manufacturers & Commerce (WMC). Companies that are either losing money or have lower profits may not have to pay more in taxes under combined reporting until their profits return to previous levels.
Some companies benefit from combined reporting because they can use the losses suffered by out-of-state subsidiaries to reduce their Wisconsin tax burden, said Don Millis, a tax attorney for Milwaukee-based Reinhart Boerner Van Deuren S.C.
“Not everyone is hurt by it. Some (companies) do better,” he said.
However, overall combined reporting is a revenue generator for the state, which means its overall impact on Wisconsin businesses is negative, Millis said.
“On the whole, it’s a money raiser (for the state),” he said.
State budget Spackle
The tax is so new that the Department of Revenue has not determined how much revenue it is producing. However, the Department of Revenue and the Legislative Fiscal Bureau estimated that the combined reporting tax law would result in additional tax revenues that will grow from $64.4 million in 2009-10 to $137.1 million in 2012-13.
Those revenues are critical for the state. The Legislature passed combined reporting when Legislators were trying to figure out how to fill the state’s budget gap.
However, using combined reporting for that purpose is bad public policy, Baas said.
“This is the worst kind of tax decision that governments make,” he said. “State government looked at the hole they needed to fill and looked at pots of money they could raid.”
State Senate Minority Leader Scott Fitzgerald (R-Juneau) said, “I think (combined reporting) is something that emerged as there was more discussion on how to pull more money from corporations.”
Wisconsin is one of 23 states that now have a combined reporting tax law. The other states include Midwest neighbors Illinois, Michigan and Minnesota and economic powerhouses such as Texas, New York and California.
Critics of combined reporting say it has hurt Wisconsin’s competitive position to attract businesses. Forbes magazine last year ranked Wisconsin as the third-worst state in the nation to do business in.
“(Combined reporting) was definitely a black eye on our business climate,” Buchen said.
“In the global marketplace right now, coming out of a recession, it is so competitive,” Baas said. “Why would you not want to have the competitive edge?”