by Mitch Kokai
Senior Political Analyst, John Locke Foundation
On Dec. 31 the California Supreme Court issued a ruling weakening one of the most important interstate compacts, a 49-year-old agreement known as the Multistate Tax Compact (MTC). The ruling, some experts say, might embolden plaintiffs who no longer want to abide by the terms of other compacts to challenge those, too. “It creates uncertainty,” says Rick Masters, a lawyer in Louisville, who is special counsel to the National Center for Interstate Compacts, a unit of the Council of State Governments.
The original MTC said member states should tax corporate income on the basis of three equally weighted factors: how many employees a company has in the state, how much property it owns in the state, and the value of in-state sales. But over the years, more than half the states, including California, drifted away from those terms with impunity. Instead, they adopted tax formulas that benefit in-state companies at the expense of out-of-state ones.
In 2005, Gillette, the razor maker owned by Procter & Gamble, sued California tax authorities, arguing that it should be taxed according to the original MTC tax formula, which was better for it as a non-California-based company. Unfortunately for Gillette, which is in Boston, the Multistate Tax Commission didn’t stand up for its own compact. Instead, the commission’s lawyers agreed with California in a friend-of-the-court brief, arguing that the compact’s taxation formula was nonbinding and didn’t supersede state law. “It was never a compact in the traditional sense of ‘compact,’?” says Elliott Dubin, the commission’s director of policy research. (The commission tweaked its formula in 2014 to reflect states’ practices.)
The impact of the California ruling remains unclear. Challenges against other compacts haven’t yet emerged since the Dec. 31 decision. The Multistate Tax Compact has been known to be squishy for years. Other compacts are considerably stronger.