By Abigail Field, attorney. Cross posted from Benzinga
While Congress cowers before multinationals’ lobbyists and moves to re-enact loopholes that let corporations like GE and Apple hide their income from the IRS, the Maine Legislature decided it had had enough. On Friday, April 4, Maine passed legislation that will end some of the games.
“I would like the Governor to sign the bill,” said Rep. Adam Goode, the sponsor of the legislation. “The bill is about huge multinational corporations that hide their income in off shore tax havens. Small businesses in Maine don’t use these tricks. That puts Maine’s small businesses at a competitive disadvantage.”
Governor LePage has ten days to sign the bill into law, veto it, or let it become law without his signature. According to Maine Revenue Services, closing the “Water’s Edge” loophole will raise $10 million for every two year budget cycle.
“In Maine $10 million is a lot of money,” said Rep. Goode. If the Governor vetoes the bill, “we’re sending a message that we’re prioritizing multinational corporations’ access to tax havens over kids’ access to head start or seniors’ access to prescription drugs. Those programs are routinely on the chopping block.”
The Water’s Edge Loophole
Companies can dodge taxes by shifting income to low-tax jurisdictions. Not only do they send the money to tax havens off shore, but they also set up companies to hide income in low tax states, such as Nevada and Delaware. Twenty-three states and the District of Columbia countered stateside tax avoidance by “combined reporting.”
Combined reporting requires companies to report their income in all states; then the combined income is taxed in proportion to the business’s activity in their state. That way, if large amounts of income that were produced by business activity in, say Maine, but were reported for tax purposes as belonging to Delaware, it would be included in the total income pie that Maine would proportionately tax.
But if combined reporting stops at “the Water’s Edge,” it only includes income reported within the United States. To get at offshore tax havens, the states can require worldwide combined reporting, or Water’s Edge plus a list of known tax havens.
Maine, like Montana and Oregon, has taken the latter approach. Rep. Goode’s bill includes a list of 38 known tax havens. Goode noted that Maine already uses combined reporting to stop corporations from hiding their money in low tax states like Delaware or Nevada. “If we won’t let corporations hide their money in Delaware, why would we let them hide it in the Cayman Islands or Bermuda?”
Multinationals Lobbied to Stop Taxes at the Water’s Edge
According to a U.S. PIRG report on how multinationals’ tax avoidance hurts states and how ending the Water’s Edge loophole would help, in the 1970s and 1980s several states required combined worldwide reporting. After the U.S. Supreme Court upheld its legitimacy, multinationals turned to lobbying and succeeded in changing state laws.
As a result, most states with combined reporting allow waters’ edge reporting, and most of the handful that require multinationals to add income from tax havens do it ineffectively. Instead of a clear list of 38 tax havens, like the Maine bill on Governor LePage’s desk, those laws invite litigation by failing to clearly define “tax haven” or otherwise fail to reach all tax haven income, according to the U.S. PIRG report.
Montana Stood Up To The Multinationals in 2003; Oregon Recently Did Too
In 2003 Montana required multinationals to report tax haven income using a clear, effective list. Dan Bucks, the Montana Director of Revenue from January 2005 to January 2013, administered the law and saw its usefulness first hand. As Bucks explained to Minnesota Legislators who considered (but failed to pass) similar legislation:
“Administratively, there have been no noticeable costs or challenges associated with the implementation or enforcement of the law. As Director of Revenue, I received no complaints from corporate taxpayers about the law, its implementation and or its impact.”
What’s more, the law worked:
“In [tax year] 2010, the additional revenue attributable to the tax haven law was $7.2 million. That revenue was due to $102.9 million of income that had been artificially shifted to tax havens, but was now reported to Montana in proportion to real economic activity in the state.”
Oregon passed similar legislation in July, 2013. Oregon’s Legislative Revenue Office expects the state will collect $18 million more in corporate taxes in 2014, an additional $42 million in the 2015-2017, and an additional $49 million in the 2017-2019 biennium, according to the U.S. PIRG report.
Governor LePage Is Mum For Now
Will Governor LePage enable Maine to shut this loophole or not? According to his Press Secretary Adrienne Bennett, “The Governor has the 10 days to take action on the bill. It is his policy not to comment until he has had an opportunity to review the bill in its entirety.”
The 10 days will expire midnight of April 16 (Sundays don’t count, and Day 1 was Saturday April 5.) As long as the Governor doesn’t veto the bill, it will become law. And a third state’s taxpayers will see multinationals pay a fairer share of their state’s bills.
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Another interesting aspect of the grand historical struggle of power between multi-national corporations and state structure. So far the Big Money has been winning the struggle as would be expected–the reason for this is simple: the public does not understand that this struggle exists and thus the prevalence of the idea that the problems we face are the fault of “the government.” We need to understand and spread the idea that the mainstream media’s job is only to deceive us and misdirect us–even more today than any other time in history. Very little good information can come to us from any major media outlet that is not vetted by political commissars.
A simple remedy for most business tax dodging is a business and occupations tax (B&O). B&O is a small percentage tax based on gross revenues with few to no exemptions. It could be enacted to tax the revenue before it is shifted off shore.
B&O taxes are applied where gross revenue is earned, so if it is earned offshore or out of state/county/municipality it does not apply. B&O taxes are more likely to affect small businesses rather than large businesses. Also, since B&O taxes are based on gross revenue rather than profit, it’s affect on small businesses is even greater. Worse yet, large corporations that have many employees within a state have been able to negotiate a lower B&O tax than tax rate on smaller businesses.
A few misconceptions:
1) A gross receipts tax applies where sales are made, not where profit is “earned.” Thus, when Nike (or Apple or GAP or 1,000 other large mega-corporations) makes a pair of shoes in China for $10, and then allocates $20 of manufacturing profit to Hong Kong (likely tax free), and allocates $30 of distribution and marketing profit to Singapore (likely also tax-free), and allocates $40 of finance profit to Cayman or Netherlands (also likely tax-free), before finally selling the shoes in the US for $125 (with a US on-shore “cost” of $100), a gross receipts tax applies to the full $125 at the point of sale, regardless of where the company allocates or “earns” its profit.
2) Small businesses (say under $100,000 of sales) can be exempted from a gross receipts tax. We all know that small businesses hate paying tax, so exempt them from a gross receipts tax so they can’t be used as political cover to shield big businesses from using a better tax system. Small businesses often buy from larger businesses anyway, so they are still paying some of the tax indirectly.
3) A gross receipts tax rewards exporters since the sale takes place outside the US; thus export sales are exempt from a GR tax. Importers (including US companies that ship jobs and manufacturing offshore) would be subject to the GR tax when they resell products and services back into the US market.
4) The administration costs to calculate, pay and audit a GR tax are a tiny fraction of the costs to calculate and audit a “net profits” tax. The multi-billion dollar “transfer-pricing” consultanting business will evaporate, letting those very talented people find other, more productive work. The multi-billion dollar corporate tax planning businesses also will be eliminated, allowing these very talented individuals to find more productive work.
5) A GR tax rate can be quite low (1%-5% of sales) and still raise significant revenue, which diminishes the incentive for businesses to cheat since the tax amount on each dollar of sales is relatively small.
6) It’s very difficult to evade a GR tax, especially if GR tax credits are given to businesses that buy goods and services subject to the tax from another vendor. The businesses could get a partial refund of the tax paid by their suppliers helping to ensure that all business gross receipts get reported. This avoids the “tax on tax” issue that’s often brought by GR detractors.
7) A GR can use different tax rates on various business types. Thus, a large landlord and billion-dollar business might be subject to a relatively high 5% tax rate, whereas a retailer and medium-sized business might be subject to only a 2% GR tax rate.
The current “net-profit” based business tax system is about as terrible a tax system as could be developed, which makes sense if we believe that large business owners and their lawyer-lobby contractors have undue influence over tax policy at the federal and state levels.
Yeah, but then we’ll widdle away over 10 times the amount of taxes recouped on “Cover Oregon,” the failed health care website.
http://tinyurl.com/qfbj77n
Oregon legislature. One step forward, ten steps back.
Sadly, Gov. LePage is just the sort of extremist who may delight in using his veto pen– to block this modest step towards corporate responsibility: http://bangordailynews.com/2012/03/23/politics/federal-judge-rules-for-lepage-in-lawsuit-over-mural-removal/
I applaud these efforts but wonder why it took so long to get even these modest efforts?