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Closing the Corporate Tax Haven Loophole

April 02, 2013 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Minnesota leads all fifty states in terms of per capita state and federal income tax revenue lost through the “tax haven” corporate tax loophole, according to a Minnesota 2020 analysis of U.S. PIRG data from The Hidden Cost of Offshore Tax Havens: State Budgets Under Pressure from Tax Loophole Abuse.  Legislation introduced in Minnesota would take a major step toward closing this tax loophole and in the process increase state revenues by an estimated $36.5 million in the next biennium.

Corporations and wealthy individuals can avoid paying federal and state taxes by taking advantage of overseas havens. As defined by the U.S. PIRG report, “Tax havens are countries or jurisdictions with minimal or no taxes. Corporations and individuals shift earnings to financial institutions in these countries to reduce their U.S. [and state] income tax liability…” In addition to low tax rates, the appeal of tax havens can also include secrecy and the ability to avoid financial regulations and criminal laws. 

Minnesota ranks sixth highest among the fifty states in terms aggregate state and federal corporate and individual income tax revenue lost through tax havens, just behind California, New York, New Jersey, Illinois, and Pennsylvania, according to the U.S. PIRG report. However, when it comes to per capita revenue lost through the tax haven loophole, Minnesota is number one. The per capita loss through tax havens in Minnesota is 14 percent higher than the next closest state (New Jersey). The map below shows the total estimated 2011 state and federal income tax revenue loss per capita.

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Tax havens allow corporations to avoid paying for their share of the public services they use. These costs are shifted to other taxpayers or translate in to cuts in public services and infrastructure. TakeAction Minnesota asked former Montana Revenue Commissioner and tax haven expert Dan Bucks to study the effects of tax havens in Minnesota. In a letter to Senate Tax Chair Rod Skoe and Senate Tax Reform Division Chair Ann Rest, Bucks concludes that:

When some multinationals artificially reduce their taxes, they gain an unfair competitive advantage over smaller enterprises that operate entirely within the U.S. and especially within a single state such as Minnesota. Taxes may shift to all other taxpayers, compounding the inequities. Lost revenue can also result in reduced investments in infrastructure, education, public health and safety and other services that support a growing economy and an orderly, healthy society.

Senator Scott Dibble and Frank Hornstein have introduced legislation—Senate File (SF) 1237 and House File (HF 1440)—that would at least begin closing the tax haven loophole as it pertains to corporate income taxes. According to the revenue estimate from the Minnesota Department of Revenue, this legislation would generate $36.5 million in new revenue for the state in the next biennium (FY 2014-15).  SF 1237 / HF 1440 would effect only state corporate income tax revenue lost through tax havens; thus the the $36.5 million revenue estimate from this bill does not correspond with the amounts from the U.S. PIRG report shown in the map, which deals with state and federal revenue lost to tax havens through both the corporate and individual income tax.

During the Tax Reform Division hearing on this bill, Senator Paul Gazelka argued that any increase in corporate taxes would be shifted to other taxpayers because corporations do not pay taxes, only people do. There is some truth to this argument; for example, a portion of any business tax is routinely shifted on to customers through higher prices. However, not all business taxes are shifted to consumers and labor; a portion is borne by shareholders and owners of the business.

Furthermore, there is nothing inherently unfair or inappropriate about a tax that is shifted on to consumers through higher prices. The price of any product should include the cost associated with its production and one of those costs is taxes. When a company averts taxes through the tax haven loophole, it gains a competitive price advantage over other—frequently smaller—businesses that cannot take advantage of these elaborate tax dodges to reduce their prices. Requiring all business to pay comparable taxes by closing loopholes helps eliminates an unfair competitive advantage by ensuring that the price structure of all businesses reflects the appropriate tax costs.

Lobbyists from the Minnesota Business Partnership and the Minnesota Chamber of Commerce complained that the SF 1237 / HF 1440 would inhibit legitimate business transactions in tax haven nations. This argument stretches credulity. According to a Congressional Research Service report, U.S. foreign company profits attributed to Bermuda—a tax haven nation—are 6.5 times Bermuda’s entire GDP. The comparable statistic for other tax haven nations is 3.5 times for the British Virgin Islands, 3.4 times for the Marshall Islands, and 5.5 times for the Caymen Islands.

When corporate profits attributed to a nation exceed the entire GDP of that nation by several fold, it is clear that there is something going on far beyond simple business transactions. Multinational corporations are using these tax haven nations to avoid paying their share of corporate income taxes, thereby resulting in less funding for public services or higher taxes on other businesses and individuals. Bucks cites numerous articles in the business press that report that “many multinational corporations have unfairly reduced their overall effective tax rates to low levels, even into single digits, through aggressive income tax shifting strategies.”

There is no point in vilifying the corporations that rely on tax havens to reduce their tax liability. Businesses exist to make a profit and the tax haven loophole enables corporations to increase their profits by legally reducing their taxes. The problem is not that multinational corporations are evil, but that state law allows elaborate tax avoidance schemes to continue. By eliminating the tax haven loophole, SF 1237 and HF 1440 make the tax system more fair while at the same generating needed revenue to help balance the state budget.

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  • Dan Conner says:

    April 16, 2013 at 8:14 am

    Any country exists only because of patriotism.  Without it there is no country.  Today, American is experiencing a profound lack of patriotism by the class of people and corporations who really have the most to thank our country for.  This is unbridled greed and selfishness.  Our corporations, which have one of the lowest effective taxes in the industrialized world, show appreciation for that by maneuvering to wiggle through tax loopholes never intended by the Congress.  Today, corporations pay a fraction of their share of general revenues they paid 40 years ago.  Laws need to be strengthened to penalize corporations that hide money in tax havens and who offshore he work.  Maybe the US should have more of a no made here, no sell here strategy.