State Legislators are Increasingly Stepping in to Combat Offshore Tax Haven Abuse
It’s Tax Day. Odds are, you’ve already filed your taxes. Maybe you filed through a tax filing software, or maybe you hired an accountant to help you puzzle through the deductions you might be eligible for. Or, maybe you filed yourself, old-school-style, filling out your 1040 in your kitchen. Or, maybe you forgot, and this blog will serve as a last-second reminder—go file your taxes!
All of this is to say: you’ve fulfilled your tax responsibilities. No doubt, the biggest corporations have filed theirs’s too. But, unlike you, they have an army of accountants to ensure they take advantage of every last loophole and gimmick to cut down on their tax liability to near nothing.
It is worth repeating that U.S. taxpayers lose approximately $147 billion every year in state and federal taxes due to corporate tax haven abuse. The stash of offshore money isn’t evenly shared by businesses in the U.S.—just 30 of the largest Fortune 500 companies own 66% of the $2.5 trillion booked offshore. Billions of dollars in foregone tax revenue every year means cuts to public programs, more national debt and higher taxes for ordinary people. Small businesses in the U.S. would have to pay, on average, an additional $5,128 in federal and state taxes per year to make up for the tax revenue lost to offshore tax haven abuse by a few huge companies.
According to the headlines, tax reform is coming and, technically, federal legislation to close corporate tax loopholes is possible. It would also be the most effective way to end the tax gimmicks and gaming. Unfortunately, these loopholes didn’t write themselves and the biggest corporations continue to spend big to lobby Congress against real reform.
Senator Bernie Sanders and Representatives Lloyd Doggett and Mark Pocan have strong bills to stop the offshoring, and we should all support them. But, we don’t need to just think nationally to counteract some of the worst tax dodging abuses.
Tax dodging has a large impact on states. Since most states are subject to balanced-budget requirements, gaps in revenue must be covered either by higher taxes for the rest of us or by cutbacks to services (e.g. education) and infrastructure. That’s why many states have stepped up.
Most state tax codes are tethered to federally defined definitions of taxable income. That means that, like the federal government, states are unable to tax money stashed in shell companies in known tax haven countries. States do not have to define taxable income this way. They can adopt a system of “combined reporting” that would allow states to count money in known tax havens as regular taxable income. Untethered from federal definitions of taxable income, states could eliminate the incentive to book profits in the Bahamas or other tax havens
This is not a particularly new or revolutionary step for states. Twenty-four states have already passed bills to institute combined reporting. The laws simply require all multi-state corporations to list the profits of all their subsidiaries on their tax forms. Combined reporting provides states with a ready formula that can be applied to tax haven income to determine which portion should be taxable by the state.
Two states—Montana and Oregon—took the next step and closed the so-called “water’s edge” loophole. The loophole limits taxable income to a corporation’s U.S. subsidiaries — shell companies in the Cayman Islands were perfect shelters. Now, these two states have a list of known tax haven countries and tax their portion of profits booked to those countries.
In 2010, the last year for which data are available, closing the water’s edge loophole allowed Montana to collect an additional $7.2 million. In the 2015–2017 biennium, the Oregon Legislative Revenue Office expects the state will collect an additional $42 million. That’s money that can go back into the pockets of ordinary citizens in the form of individual tax cuts or for go towards more and better public programs.
Today, several states are working to take that first step—instituting combined reporting—to close corporate tax loopholes. In Maryland, State Senator Paul Pinksy introduced legislation to institute combined reporting as the state faces a tight budget. Moving to combined reporting would level the playing field for Maryland small businesses that don’t have out-of-state subsidiaries with which they can game the state tax system. As Sen. Pinksy said, when it comes to which companies benefit from tax loopholes: “We’re not talking about mom-and-pops here. We’re talking about companies that are not only multi-state, but multi-national.”
In Maryland, some of the biggest companies with the most employees paid no state corporate income tax. These companies benefit from an educated workforce, an extensive infrastructure, and from access to the state’s robust market—and yet they pay little in return.
So this Tax Day, consider how your state stacks up when it comes to taking on corporate tax dodging. Are you in one of the twenty four states already working to curb tax gimmicks? Has your state legislature introduced a bill to level the playing field? If so, tell your legislators that states can take the lead in ending the offshore gaming.
With some state leadership, who knows, maybe next year you won’t be picking up the tab for the largest, most profitable companies in the world.
It won’t happen unless we push for it. So as you file your taxes, take a second to urge your state legislators to support bills to bring back a little fairness to the tax code.
Michelle Surka is the Tax and Budget Advocate at U.S. PIRG.