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December 14, 2012
Tensions Mounting Between MTC and NCSL Task Force Over Commission's Role

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by Amy Hamilton

Noting that the Multistate Tax Commission is a governmental body while the National Conference of State Legislatures is not, an MTC Executive Committee member is criticizing as inappropriate letters from an NCSL task force instructing the MTC about what it should and should not be doing.

At least one member of the Multistate Tax Commission Executive Committee is voicing his frustrations with the dynamics between the MTC and a National Conference of State Legislatures task force.

Montana Revenue Director Dan Bucks spoke candidly about the nature of communications from the NCSL Executive Committee Task Force on State and Local Taxation several times during the MTC Executive Committee's December 6 fall meeting.

Noting that he was an NCSL staffer years ago, Bucks expressed concern that NCSL task force members do not seem to appreciate that the MTC is an official governmental body while the NCSL is not.

Yet, Bucks said, the task force continues to send letters to the MTC "in the nature of instructions about what the MTC should and shouldn't be doing, as opposed to input on the substance of the issues."

The NCSL task force's input in these communications "implies some type of governing authority" over the MTC, Bucks said, and "is really inappropriate and really is not very helpful, but rather conflicts with the laws of the states on who governs the Multistate Tax Commission."

Bucks reserved his harshest criticism for a discussion later in the meeting prompted in part by the NCSL task force's request that the MTC set aside its project on passthrough entities. That project focuses on corporations that are restructured as passthrough entities and then placed under parents that also are not subject to state income taxation; the focus originally had been on limited liability companies placed under insurance company parents.

As with other MTC projects, the NCSL based its request in part on the fact that no state has enacted a similar law and that no legislators are calling for the adoption of such a proposal.

"I have never heard of an idea where somebody cannot make a proposal or a suggestion to a legislature unless it's already been approved by a legislator to bring up the idea," Bucks said. "Democracy is an open process. And the notion that you have to get permission from some official before you bring up an idea or a proposal is more suitable to a medieval monarchy or an authoritarian regime. It is antithetical to the very idea of a free flow of ideas and information in a democracy."

NCSL Letters

Over the past 18 months, the NCSL task force has sent letters to the MTC in which it has:
  • objected to the MTC developing proposed amendments to the Uniform Division of Income for Tax Purposes Act, which is the apportionment formula in the Multistate Tax Compact;
  • asked the MTC to defer action on the UDITPA project until the issue in Gillette v. Franchise Tax Board is resolved; and
  • requested that the MTC set aside its proposal to tax corporations that are restructured as passthrough entities and placed under parents that also are not subject to state income tax; this project originally focused on such restructurings under insurance companies.

The NCSL task force also has debated the MTC's practices more generally, including whether the MTC should draft model legislation at all. (For prior coverage, see State Tax Notes, Nov. 26, 2012, p. 619, Doc 2012-23758, or 2012 STT 224-2 .)

Bucks said the MTC's governance structure is delegated by the legislatures of Multistate Tax Compact member states. The NCSL has no process jurisdiction over the MTC, no governance jurisdiction over the MTC, and no official governance authority over any state activity by any other interstate organization, Bucks said.

"As to whether or not this organization can proceed with any activities without their approval, I think that's a foregone conclusion," Bucks said. "They have no role in approving our projects. They have no governance role in the Multistate Tax Commission. And yet they address us in that manner."

"My question is, has this come up in the dialogue?" Bucks asked. He said that if it has not, the MTC needs to have a frank discussion with the NCSL task force members.

North Dakota State Tax Commissioner Cory Fong (R), the MTC's current chair, said that while all these points are embedded in the MTC's in-person discussions with the NCSL task force, often the MTC representatives are allotted a few minutes to discuss certain issues, after which the conversation can quickly turn to other topics.

Fong said that some NCSL task force members also are not from compact member states and thus might not have as clear an understanding about the nature of the MTC as a multistate governmental body.

Utah State Tax Commission Chair Bruce Johnson said that he has not been as direct as Bucks in discussing with the NCSL task force the MTC itself as a governmental body. Instead, he has tried to convey more generally the appropriateness of legislative branch and administrative branch roles in developing tax proposals for consideration by full state legislatures.

"That is, we have a responsibility to develop proposals for the legislature to consider, and we really don't wait for the legislators," Johnson said.

Throughout the meeting Johnson repeatedly emphasized that the MTC welcomes the NCSL task force's input, as well as that of interested parties, and that the MTC believes the talks have been productive. He added that as a practical matter, sometimes everyone is better off picking up the phone and speaking directly to each other rather than trying to communicate primarily through formal letters or articles reported by news organizations.

Project on Passthroughs

When considering an NCSL task force letter asking the MTC to halt work on the passthrough entity project, MTC Executive Committee members returned to talk about recognizing the separation of powers between branches of government.

The MTC's project addresses the restructuring of formerly taxable corporations as passthrough entities that are then placed under parents that also are exempt from state corporate income tax. Insurance companies are one example, but banking and telecommunications parents are examples of other types of ownership entities that can be used in similar planning.

The MTC earlier this year made public its preliminary analysis of the organizational charts of three insurance companies, documenting how -- since the late 1990s -- some of the nation's largest retail mutual funds and their asset management corporations have been converted into LLCs and placed under insurance company parents. Under such a reorganization, the formerly taxable fees for managing hundreds of billions of dollars of assets now escape state income taxation altogether. (For coverage, see State Tax Notes, May 7, 2012, p. 348, Doc 2012-8259, or 2012 STT 84-1.)

In the December 3 letter, NCSL task force members said the gross premium tax system imposed by most states on the insurance industry is one of the oldest forms of state business taxation. The MTC's proposal "not only threatens this settled system of taxing the insurance industry, but it also has negative implications for state regulation of the insurance industry as a whole."

Further, the NCSL letter said that the Dodd-Frank Act requires the Federal Insurance Office to study the creation of an optional system of federal regulation of the industry. "The MTC, with its narrow focus, may be unaware of the potential impact of its project on the entire system of state insurance regulation. By singling out the insurance industry for punitive taxation and making compliance with tax laws more difficult, the MTC project adds weight to those calling for federal regulation of the industry."

The NCSL task force said it asked the MTC to set aside the project, partly because its members are unaware of any state having enacted a proposal similar to what the MTC considered. "Nor are we aware of any legislators calling for the adoption of such a proposal by the MTC or the states," it added. (For the December 3 NCSL task force letter to the MTC, see Doc 2012-25094.)

Johnson, who has repeatedly expressed concern about the breadth of the MTC proposal, said the NCSL task force letter implies that tax administrators "only ought to develop things where the legislators bring it to us and say there's a problem."

"And frankly, it's not surprising to me that their constituents haven't gone to them and said, 'We're an insurance company and we're just not paying enough tax.' That's typically not the way tax proposals get developed," Johnson said.

Noting that many state tax proposals originate in the executive branch, Bucks discussed the institutional role of state tax administrators in the process. State tax officials, who have access to confidential tax return data, are often better positioned than legislators to spot inequities in the incidence of taxes, Bucks said.

"Tax administrators are the translation point between confidential information and public policy issues," Bucks said.

After noting that his own state by statute imposes an affirmative duty on the revenue director to identify issues and develop proposals addressing them, Bucks talked about democracy as an open process during his critique of the notion that the MTC needs permission from the NCSL task force before taking up work on a proposal.

Turning to the substance of the MTC passthrough entity project, Johnson said the NCSL letter describes the proposal as punitive to the insurance industry. "I don't think this is punitive," Johnson said, adding that the proposal addresses an equity issue instead.

Also, Johnson said, the NCSL task force letter discusses upsetting the states' long-standing practice of taxing insurance companies. But, Johnson said, "that long-standing practice was developed at a time when insurance companies were precluded by federal law from doing the kinds of things they're doing now."

At the in-person meetings, Johnson said, the NCSL task force members acknowledged that there can be what the lawmakers called abusive situations. However, Johnson said, he wouldn't characterize the situations the MTC proposal is attempting to address as abusive situations.

"It's not a sham," Johnson said, adding that such restructuring is legal under current law. "It's not an abuse."

"I think we have to recognize that the industry has changed and that the taxation environment is no longer adequate," Johnson said. "The companies are entitled to take advantage of the existing environment. And we're entitled to recommend changes to the existing environment if we think that's appropriate."

The MTC Executive Committee voted to refer the proposal back to a drafting committee for more work, with the intention of having it come back later this spring for possible referral to a public hearing at that time.

Bucks, however, suggested that the MTC "affirmatively respond to the NCSL right now" by moving the proposal directly to a public hearing. The MTC could instruct the hearing officer to receive input on the regulatory issues raised by the NCSL task force, he said.

Bucks's reasoning had been that most people are more familiar with public hearings than with the MTC's internal processes for developing proposals and that if the MTC keeps referring the draft back to drafting committees, it might seem to the NCSL task force that the process is less open.

Separately, the MTC Executive Committee voted to forward to a public hearing the MTC's package on proposed UDITPA amendments. The committee moved the package forward in the adoption process after considering an NCSL task force request that the MTC defer such action until the Gillette issue is resolved. (For prior coverage, see Doc 2012-25103 or 2012 STT 236-1 .)

NCSL Responds

Utah Senate Revenue and Taxation Committee Chair Curtis Bramble (R) is one of the NCSL task force members participating in the smaller, concentrated meetings with MTC representatives.

Bramble told Tax Analysts that he also was one of the designated spokesmen who in 2009 delivered the message to the Uniform Law Commission that if it continued with its own UDITPA project it faced a potential effort to defund its operations. That joint message came from the NCSL, the American Legislative Exchange Council (ALEC), and the Council of State Governments.

The Uniform Law Commission wound up discontinuing its study of whether to revise UDITPA but left open the option of restarting the effort later. (For prior coverage, see State Tax Notes, July 6, 2009, p. 7, Doc 2009-14944, or 2009 STT 124-1.)

"We're at the same juncture at this point with the Multistate Tax Commission," said Bramble, a member of both the NCSL's governing board and ALEC's board of directors. "Or, I should say, we may be at that same juncture, because none of those bodies have taken any formal action yet."

Bramble said that he and South Dakota state Sen. Deb Peters (R), the NCSL task force's vice chair, as recently as December 12 have talked to state lawmakers who "are considering or have already begun the process of drafting legislation to either remove funding from the MTC or to simply repeal the [compact] enabling legislation or statute in their respective states."

"This a serious issue," Bramble said.

When asked, Bramble and Peters did not name the states where such legislation might be in the works. However, Bramble said the phenomenon of legislators pushing back against the MTC is gaining momentum, "like a snowball that's beginning to start rolling downhill."

As to Bucks's point that the MTC is an official governmental body, Bramble said, "Let's put this in perspective," and then broke the relationships down, noting that "each one of those tax administrators administers the tax policies established by the legislature."

"It is the exclusive prerogative of elected legislators to set state tax policy for their respective states, period," Bramble said. "It is not the role of the tax administrators to set tax policy. Their role is to administer the tax policies established by elected officials."

As Bramble sees it, the MTC "is freelancing, going well beyond what policymakers are comfortable with." For years now state lawmakers "have made it abundantly clear that we're unaware of any elected policymaker that has requested a revision of UDITPA," he said.

"One of the bedrock foundations of the United States is, states are the laboratories of democracy," Bramble said. "If you look at the tax climate in every state, states try to be competitive. To have a group of tax administrators try to diminish or eliminate the ability of states to compete on favorable tax policy is contrary to the notion of 50 laboratories of democracy."

Regarding the passthrough entity project, Bramble said: "For a group of tax administrators to say that the investment income of an insurance company should be subject to tax when states have a gross premium tax, that is clearly in the realm of setting policy, not administering policy, and goes well beyond the authority of any tax administrator in the United States that I'm aware of."

Meanwhile, Peters, who is also from a compact member state, called the MTC "a creature of the legislature, since we created [the compact], but we can easily opt out as well."

She wondered whether the MTC isn't "wasting our taxpayers' dollars" by meeting and developing model legislation "that wasn't asked for by policymakers" and that then doesn't move forward in any of the states the MTC represents.

Peters called the past 18 months of meetings between the NCSL task force and the MTC "a good relationship" in terms of both groups getting to know the missions and goals of the other. But "since we've started to figure out what they're doing and what kinds of initiatives they're pushing down on state policymakers, I think it's frustration for both sides," she said.

Amy Hamilton

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