Photo by ssteege1.

D.C. recently reported a $417 million surplus, a portion of which came from underspending by government agencies and another portion from healthier-than-expected estate tax collections. But as the D.C. Fiscal Policy Institute writes today, a big chunk of that extra money came from closing a corporate tax loophole:

As Dr. Gandhi noted in his testimony on the surplus, combined reporting was a major contributing factor to DC’s improved corporate tax collections.

Without combined reporting, large multi-state corporations can shift their reported income and profits among various subsidiaries in ways that reduce the profits reported in any given state. Beyond the problem of avoiding taxes, this also creates an unfair advantage over local businesses, which don’t have any way to shift their profits. Combined reporting requires corporations to report the income of all subsidiaries together and then apportion that total income among the states where they do business. It is viewed as the most comprehensive way to close corporate tax shelters, and is now used by 23 states and the District.

By requiring the multi-state corporations pay taxes here instead of shifting profits around to other states, D.C. took in tens of millions of revenue more than in years past; all told, the city saw a 40 percent jump in corporate taxes in 2012.