Corporate Tax Loophole?

Corporate Tax Loophole?

January 5, 2008 Posted by J. Scott Moody - No Comments

The Portland Press Herald ran a story today about how lawmakers want to close a “loophole” in the corporate income tax that would force Plum Creek to pay more taxes on their proposed development on Moosehead Lake. The article states:
“Legislation submitted this week could make Maine the first state to force real estate investment trusts, including Plum Creek, to pay corporate income tax on windfall profits. The trusts, or REITs, pay little or no tax on income at the corporate level because they pass their earnings directly to shareholders, who pay income taxes in their home states.”
This legislation shows a clear lack of understanding about how the tax code works and its effects on the economy. REITs, like Subchapter S Corporations, were a half-hearted attempt by the U.S. Congress to address the issue of double-taxation inherent within the current income tax system. In essence, income is taxed once at the business level and again at the individual level–which is double-taxation. The complete solution is to either repeal the business level tax or the individual level tax. Instead, Congress opted to create various hybrid entities, like REITs and S-corps, that allow business income to flow to shareholders where it is taxed–ONLY ONCE!
While not a perfect way to deal with the issue of double-taxation, REITs and S-Corps, were a step in the right direction. Removing this so-called “loophole” would move Maine’s tax code in the wrong direction. This is why Maine would be the first state to remove this “loophole” since everyone else realizes that it is not loophole. REITs and S-Corps are a solution to the bigger problem of corporate double-taxation.
If Maine truly wants to be the first in the nation to enact a law that actually improves the tax code; why not eliminate the corporate income tax altogether and settle the double-taxation issue?