State Tax Draws Flak

American, European, and Japanese corporations as well as foreign governments have been waging a heavy protest campaign ever since the U.S. Supreme Court ruled in June that states can tax a multinational corporation based on its worldwide income (see MM, Sept. 1983). Over the months, the companies have stepped up pressure on the Reagan administration to back proposed congressional legislation that would override the court decision and prohibit states from using the so-called unitary taxation method.

Amid persistent reminders from the states of his highly-touted policy of federalism, Reagan has so far refrained from siding with the corporations. In doing so, the president has rejected the unanimous recommendation of his cabinet council on economic affairs. Reagan opposed efforts to limit unitary taxation while governor of California, the state that raises the most revenue from the method.

Instead, the administration has resorted to its usual means of dealing with controversial matters: it has appointed a commission to look into the matter. The commission is expected to recommend against abolition of the tax method, but will propose that it be restricted slightly.

At least one state, Florida, acted quickly to adopt unitary taxation after it was approved by the Supreme Court, bringing to 12 the number of states that use some form of the method.

The trend has alarmed the U.S.'s largest foreign investors, who are pressing for retaliatory measures. In the last few months, for example, the London Chamber of Commerce cancelled a trade mission to Florida because of its new law; Japanese electronics companies warned that they may halt investment in states using the method; sixty British companies lobbied Parliament to pass retaliatory legislation; and West Germany suggested it will take a hard-nosed attitude in negotiating anew German-U. S. tax treaty.

- based on a report by Tyler Bridges