Bloomberg News

States Pursuing Cash That U.S. Companies Stash Overseas: Taxes

April 10, 2014

U.S. states are trying to capture corporate income taxes lost to offshore havens, wary of companies exploiting rules that let them channel cash abroad and weary of congressional inaction.

Oregon enacted a bill for the 2014 tax year identifying 39 countries and territories as corporate shelters a decade after Montana passed the first such law. The Democrat-controlled Maine legislature gave initial approval this week to similar legislation over Republican objections that it was “anti-business,” and states including Minnesota and Rhode Island are considering or studying such measures.

States have taken the lead on issues that a paralyzed Congress can’t or won’t address, such as raising the minimum wage and restricting guns. Now, they’re tackling international tax rules. Supporters say that besides generating additional money for public services, laws targeting tax havens help small businesses that can’t avoid the levies as multinationals can.

“The issue at hand is one of fairness,” Maine Representative Adam Goode, a Democrat from Bangor, said during debate April 1 on the bill he sponsored. “It really just seemed not in balance, not smart and not fair that we would allow multinational corporations to hide their corporate income in a place like the Cayman Islands or in Bermuda.”

Haven Incentive

Companies with subsidiaries or operations in countries with lower tax rates can account for U.S. profits there, reducing the take for states. Businesses are taxed at U.S. rates on income wherever they earn it. They get credits for payments to foreign governments and don’t pay domestic taxes until they repatriate the money. That gives them incentive to book profits in low-tax jurisdictions and leave it there.

Such profit-shifting costs the federal government between $30 billion and $90 billion a year, according to a 2013 Congressional Research Service report. The U.S. Public Interest Research Group, which seeks to counteract corporate influence, puts the amount that states lose at $20 billion annually.

States increasingly are focusing on tax havens because the amount of income that corporations are shifting is increasing and awareness of the practice is growing, said Dan Bucks, the former Montana director of revenue and a former executive director of the Multistate Tax Commission.

“Corporations can use accounting games to stash income,” Bucks said in a telephone interview.

Big Rewards

The largest U.S.-based multinational companies have accumulated $1.95 trillion in profits outside the U.S. That’s up $206 billion, or 11.8 percent, from a year earlier, according to securities filings from 307 corporations reviewed by Bloomberg News. Microsoft Corp. (MSFT:US), Apple Inc. and International Business Machines Corp. (IBM:US) added $37.5 billion, or 18.2 percent of the total increase, during the past year.

Caterpillar Inc. (CAT:US) avoided $2.4 billion in U.S. taxes over more than a decade by shifting profits from a parts business to a subsidiary in Switzerland, according to a report issued March 31 by a Senate committee. The company said it was a legal and appropriate way to eliminate expenses.

Few of the states that have passed or are contemplating tax-haven legislation are home to a large multinational such as Microsoft, which is based in Washington, or Apple in California, IBM in New York and Caterpillar in Illinois. Those states would stand to collect substantially more from such measures.

California lost the most to offshore havens in 2011, an estimated $3.3 billion, the Public Interest Research Group said. That’s enough to educate 257,000 schoolchildren for a year, according to the state budget.

Gutsy Move

“It takes courage to take on some of the largest corporations in this country,” Maine Representative Joseph Brooks of Winterport, an independent, said during the debate on that state’s bill. “If you don’t believe me, look at Congress.”

Business groups including the Council on State Taxation, a Washington-based trade association, oppose tax-haven measures. States already have tools to address artificial income shifting, and punishing companies without proof is unfair, said Ferdinand Hogroian, the group’s tax and legislative counsel.

“The fact that you are doing business or have an entity outside the U.S. does not represent the fact that you are shifting income out of a state,” Hogroian said.

While Minnesota Governor Mark Dayton, a Democrat, is concerned about the issue, distinguishing legitimate overseas business activity from tax dodging is difficult, said Myron Frans, the state’s commissioner of revenue.

“We do know that there is some tax avoidance going on,” Frans said by phone. “We haven’t seen a proposal yet that would meet our standards” for dealing with that.

‘Our Job’

Oregon state Representative Phil Barnhart, a Democrat who sponsored tax-haven legislation there last year, said states have an obligation to hold corporations accountable.

“To the extent that they have figured out ways to avoid paying their proper share, then it’s our job to try to prevent them,” Barnhart said by phone.

States are using a variety of tactics. The Montana, Oregon and Maine measures name countries or territories as havens. Alaska, West Virginia and the District of Columbia set criteria to define them, which avoids countries’ complaints about being “blacklisted.”

Inaction in the politically divided U.S. Congress drives states, said Joe Huddleston, executive director of the Multistate Tax Commission, an intergovernmental agency in Washington.

“Most states don’t see the feds taking any action on this and they feel like they have to,” Huddleston said.

Going Alone

On other issues, at least 34 states are considering whether to increase the minimum wage, according to the Denver-based National Conference of State Legislatures. Connecticut, Maryland, Delaware and West Virginia already have this year.

Colorado, Connecticut and New York added gun restrictions after Congress failed to act on President Barack Obama’s push for federal legislation following the December 2012 shooting at a school in Newtown, Connecticut that killed 26 people, including 20 first-graders.

Tax-haven measures may similarly spread, said Cara Griffith, editor in chief of Tax Analysts’ state and local publications.

“We’re going to see more and more states look at this issue, particularly if one state can show in any respect that they got some money out of it,” she said.

Montana collected $7.1 million in additional tax in 2010 from the five top havens it identified, according to a 2012 report, while Oregon is projected to capture about $18 million a year initially. Maine’s bill would mean an additional $5 million, according to a fiscal note. Governor Paul LePage, a Republican, hasn’t said whether he will sign it.

Ron Erickson, 80, a former lawmaker who sponsored Montana’s bill in 2003, said he expects more states to act.

“I’m discouraged that it’s gone this slowly, but I’m also of the confident sort that thinks that eventually fairness wins out,” Erickson said.

To contact the reporter on this story: Mark Niquette in Columbus at mniquette@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Don Frederick


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