Connecticut Taxing Corporations on their Worldwide Income

This is absolute madness.  

The last time we visited the formerly great state of Connecticut, Democrats were preparing to raise taxes again after promising not to when they ran for re-election in 2014. This week they did the deed, and the politicians seem shocked that the business community is in revolt.

The blue-state paragon’s two-year budget of $40.3 billion includes a $1.5 billion net increase in taxes and fees. The top marginal individual tax rate rises to 6.99% from 6.7%. But the biggest blow is making permanent a 20% surtax on a company’s annual tax liability—a tax on a tax—and for the first time taxing Connecticut companies on their world-wide income, rather than what they earn in the state.

The high marginal rates are bad enough, but it is an astonishing overreach to tax corporations headquartered in your state based on their worldwide income.  This leads to a huge double taxation problem for any company dumb enough to stay.   Paraphrasing Keith Richards, that is the equivalent of being told to leave the state.


  1. Andrew_M_Garland:

    The FedGov taxes worlwide income, after a deduction for foreign taxes paid up to the level of FedGov taxation. That is, there is no deduction for foreign taxes paid at a higher rate than the FedGov rate.

    Does Connecticut now do the same thing? This would avoid double taxation, but would apply CT taxation with a vengeance.

    States already require declaring all income, then accounting for which income was earned in other states or countries. So, the burden of accounting would not change much.

    Regardless of double taxation, it would remain a hefty single taxation.

  2. Michael Moran:

    OK. US taxes corporations on their share of Subpart F worldwide income from controlled foreign corporations. Basically Subpart F income is passive income. So active (or trade or business) income earned by GE in Germany or China or France is not subject to current US taxation. So a GE subsidiary builds a turbine in a factory in France and sells it to a Germany company. That income would not be subject to US tax until the profit from the sale was distributed to GE, and GE would get to reduce the US tax it pays (a credit not a deduction) by the amount of French or German income tax paid by the GE subsidiary paying the dividend.
    Now, what is Connecticut doing?
    Normally states apportion US income based on factors like payroll and sales. Normally there would not be any non US income as non US income will be earned by subsidiary corporations incorporated and operating outside of the US.

  3. jimb82:

    But that's only if there is a tax treaty between the US and that foreign country for reciprocal treatment. The US doesn't have tax treaties with many non-OECD countries.

    True, states normally apportion income, but California and Texas don't. Both states assume that all income by the corporation group (broadly construed to include companies under substantially common ownership, to catch parents, affiliates, and subsidiaries) is in-state revenue, income, payroll, or assets (depending upon the basis for taxation) unless proved otherwise. I assume Connecticut is adopting a similar rule, which is still an outlier, but not unprecedented. I think New York does the same with personal income.

    I had a client once that shipped some jet fuel from the port in Long Beach on the pipeline to Phoenix, where it was all received. California taxed every drop as if it were sold in California, then required the company to apply for a refund that took several YEARS to receive.

  4. jdgalt:

    I would think they would at least have to credit you for taxes you paid elsewhere on the same income. The Supreme Court recently said so for individuals here.

  5. Michael Moran:

    No. Subpart F rules work whether there is a treaty or not. So GE earns non Subpart F income in non treaty country, no US tax till the subsidiary dividends the income back to GE US. Also, irrespective of treaty, still get credit.
    I am a Texas tax lawyer so I do not deal much with state income taxation. But Texas does not tax non Texas source corporate income.

  6. jimb82:

    True on subpart F, but not for credits for tax paid by a corporation to a foreign country for foreign sourced income. Subpart F is an exclusion, not a credit.

    As for Texas, Texas does not tax non-Texas corporate income (revenues, assets, whatever) IF the company can demonstrate that it is not Texas sourced. But Texas starts with the assumption that all income for the corporate group is Texas sourced, unless otherwise proven. I suspect that's what Connecticut is also doing here, but obviously I don't know exactly what the law says.

  7. mesocyclone:

    If progressives had a clue about capitalism, they wouldn't be progressives.

  8. Matthew Slyfield:

    If they had a clue about anything, they wouldn't be progressives.

  9. TeleprompterOTUS:

    I expect many other blue states will follow Connecticut's' lead. I wonder if red states will follow or abstain in an effort to draw business relocation. Hogs at the trough.

  10. poitsplace .:

    That's not technically true. We've lost sight of what the heck progressive and liberal actually are. Most "conservatives" these days are technically both liberal and progressive.

    But that's the problem..the battle is essentially won and there is a group trying to push for "more liberal" than liberal policies and "more progressive" than progressive policies. This is not unlike approaching the north pole...passing through it...then naively thinking you're making progress northward because you kept walking straight.

  11. obloodyhell:

    }}} a tax on a tax

    Yeah, that's always struck me as an insane concept.

    Come the revolution, "No Taxes on taxes" seems like one of the planks to be adamant about.

  12. obloodyhell:

    }}} If progressives had a clue about capitalism, they wouldn't be progressives.

    Your comment seemed overly long, so I shortened it fer ya....

    De Nada.

  13. obloodyhell:

    No, your analogy is false, because
    1) There's a clear point of diminishing returns. It's an asymptote they're pushing towards
    2) At some point you start sliding down the curve of the asymptote -- that end point is most emphatically not a place you want to go. Hint: the pathway there is paved with good intentions.

  14. obloodyhell:

    Even the other blue states will step back when they start losing massive numbers of businesses.

    Connecticut, like Cali, though, will continue to bull through.

    No surprised, remember, the Dems in Connecticut are the same ones -- further down along nutjob road, of course -- who excommunicated Joe Lieberman for heresy.

  15. obloodyhell:

    Not until the SCotUS forces them to do so.

  16. Michael Moran:

    Section 902 of the code gives US corp a credit for non US taxes paid by subsidiary that is cfc. No treaty is needed. So in your example 902 would give US corp credit for Nigerian taxes paid.
    I do not know much about state corporate income taxation, but my guess is real rub of Connecticut corporate income tax is rate, not "worldwide income" issue.

  17. jdgalt:

    How about, if there's a tax on a tax, the people who levied the first tax should be the ones who have to pay the second!

  18. poitsplace .:

    You seem to have missed what I'm saying. I was saying they're PAST the point of diminishing returns on that road paved with good intentions. They are now a force of oppression, harm, and backward thinking.

  19. jimb82:

    Learn something new every day. Thanks for that.

  20. joe:

    The new Connecticut law is a switch to combined reporting, (or at least an expansion of combined reporting). Under combined reporting all subsidiaries are included in the state tax base whether or not the sub has nexus in the state. The standard apportionment formula (sales, property, wages) is then used across the combined group's net income. For many corps, the effect may be little or no change in tax due to the reduced % of state source income compared to total income.
    In GE's case, this is likely to be a very large increase since the parent likely has very little CT source income at the parent level.

  21. Steve-O:

    In theory, the income isn't taxed elsewhere. If every state had this tax system, 100% of the income would be taxed once. This is the "external consistency" test that state taxes must meet to pass Constitutional muster.

    If companies haven't engaged in strategic tax planning (that is, if their reported income represents the economic substance of their operations), there's no reason to think this would increase their CT tax liabilities. More income is included in the pre-apportioned tax base, but the share of that income apportioned to CT would decrease. If you have a foreign affiliate who was previously excluded from your CT tax return with the same sales and profitability as your domestic entity, just in a different country, your tax would be the same. Income would double, CT's calculated share (%) would be cut in half, and CT income subject to tax remains the same.

  22. marque2:

    There is a trick to taxes from other entities. I believe corporate taxes are flat so it doesn't matter, but with personal taxes, each state assumes all the money you earned in other states is the first income earned, and so if bracketed you won't get the money back. I had this problem when I worked in CT and earned $20,000 there. I had to pay $600 because at the time CT had a flat 3% tax. California assumed that 20k was the first part of my income, and because CA has highly progressive taxes, they calculated my CA tax would be $95, so I basically lost $500 in tax credit. My average CA tax was 5% if they properly averaged the money, I should have gotten the entire CT amount back since CT on average, at the time, had lower income taxes then CA.

  23. joe:

    Marque2 - "But with personal taxes, each state assumes all the money you earned in other states is the first income earned, and so if bracketed you won't get the money back."

    Mississippi follows that approach whereby the MS source income for a non resident is taxed at the lower brackets first.
    However, most states compute the non resident share of tax based on the non residents total federal taxable income (with the state modifications) as if all the income is earned in that respective state and then multiplying the total state income tax times the percentage of income sourced in that state. (thus, only receiving partial benefit of that states lower tax brackets)

  24. marque2:

    We are probably talking the same thing. If I live in CA and earned 20k in CT and 80k in CA, both states would base my income tax on 100k of income, however both states would assume the other states income was earned first, that way with graduated income taxes they can both stiff you on taxes, and credits. CT would charge me 3% (at the time) of the 20k, assuming it was from 80-100k, so would charge $600. CA will say, I earned that money in CT first, so instead of letting be deduct up to 8% of taxes in the upper bracket, they only let me deduct 0.5%, since deductions apply to the first earned money and then taxes are applied at the lowest brackets. Even though I paid an average 6% of income tax in CA and therefore all $600 of CT taxes should be credited to my CA tax burden, CA claims since the CT income came first I would only owe $100 in CA and therefore they are only going to give me a $100 credit.

    Point being due to evil accounting tricks, to rip me off, I was penalized $500 for working in another state.

    Anyway, the numbers are real and from my tax in 2011. The state should dona weighted average, and assume my CT money was earned evenly over the 100k total. Basically this is the same as using average taxes. Your average tax is 5% in Ct it is 3% sonwe will credit the whole amount.

  25. Ron H.:

    "Come the revolution, "No Taxes</b on taxes" seems like one of the planks to be adamant about.

    Your comment seemed overly long, so I shortened it fer ya...

    de nada :)

  26. Rick Caird:

    Ask Florida how that worked for them. IBM moved out.

  27. Michael Moran:

    Thanks for answer Joe. But isn't it stupid, as GE needs to fire all employees in Connecticut and sell all property in Connecticut, so to reduce amount apportioned to Connecticut? Something else is at play, as both GE and some insurance companies objected. Unless something else was at play (like deeming investment assets to be Connecticut based), they would avoid tax and not complain.