Congress cuts, the states pay

Washington Post: Do large corporations need another tax break? The House of Representatives seems to think so. It plans this week to take up a measure defining when states can tax companies doing business in their states -- and making it easier for companies to avoid paying state taxes.
The Congressional Budget Office estimates that the Business Activity Tax Simplification Act (BATSA) would drain $1 billion from state government treasuries during its first year in effect and $3 billion a year by 2011 as corporations rejigger their activities to take advantage of this new tax avoidance opportunity. This is an unwise shift of resources from state treasuries to corporate bottom lines -- as the National Governors Association put it, "a federal corporate tax cut using state tax dollars."
Redefining 'activity'
The measure, sponsored by Virginia's Robert W. Goodlatte, R, and Rick Boucher, D, would limit states' ability to impose "business activity" taxes, chiefly corporate income taxes, on out-of-state corporations. It would allow states to tax only businesses with a "substantial physical presence" in the jurisdiction -- not a sensible standard in an Internet era when being there and doing business aren't necessarily one and the same.
Even if "physical presence" is the proper test, the measure defines so many exceptions, that a company with dozens of employees in a state or selling millions in services there could easily avoid taxation. The Congressional Research Service found that the proposal would "exacerbate the underlying inefficiencies" of the existing system and generate more "nowhere income" -- earnings that aren't subject to taxation in any state.
In a 50-state system and at a time when technology has facilitated companies' ability to do business in multiple jurisdictions, corporations have a legitimate interest in being shielded from burdensome taxation. It makes no sense to require a company that does little business in a particular state to go through the expense and hassle of paying state taxes. At the same time, companies that have significant operations in or economic ties to a state can fairly be asked to pay taxes on the benefits they receive from doing business there. This proposal strikes the wrong balance.