A Simple Fix for a $17 Billion Loophole: How States Can Reclaim Revenue Lost to Tax Havensreport
Senior Policy Analyst
Every year, corporations use complicated schemes to shift U.S. earnings to subsidiaries in offshore tax havens—countries with minimal or no taxes—in order to reduce their state and federal income tax liability by billions of dollars.
Meanwhile, smaller, wholly-domestic U.S. businesses cannot game the system in the same way. The result is that large multinational businesses compete on an uneven playing field, avoiding taxes that their small competitors must pay. Innovation in the marketplace is replaced by innovation in the tax code.
The companies that abuse tax havens benefit from America’s markets, public infrastructure, educated workforce, security and rule of law—all supported in one way or another by tax dollars. When it comes to supporting the services we all depend on for a stable, secure and thriving community, ordinary taxpayers and domestic competitors end up picking up the tab for tax dodgers, either in the form of higher taxes, more debt or cuts to public spending.
While much attention is paid to the impact of tax haven abuse on federal revenue, offshore tax havens also reduce state revenue because state tax codes are often tethered to federally defined taxable income. Instead of reducing the problems of offshore tax dodging, recent changes to federal law increase the incentive for companies to stash their profits abroad.1 But even as Congress has missed opportunities to address tax haven abuse, there are changes states can make to reduce the impact of offshore tax dodging on state budgets.
Our report explores several options for states to address profit shifting. The main mechanism which states have created to address multi-jurisdictional profit shifting is known as “Combined Reporting.” In a Combined Reporting system, companies report their total domestic profits, including all their subsidiaries, to which the state applies a formula to calculate how much of that profit is attributable to business activities in a given state to determine taxable profits in that state. Twenty-seven states and the District of Columbia have enacted Combined Reporting systems, most recently Kentucky and New Jersey in 2018 (effective Jan. 1, 2019).2
While combined reporting is a vital strategy for preventing domestic corporate tax avoidance, there are two ways the Combined Reporting system can be expanded to address offshore tax haven abuse.
- Require Worldwide Combined Reporting, Also Known as “Complete Reporting.” Already an option for many states operating with a Combined Reporting system, this is the simplest and most comprehensive way to eliminate profit shifting to dodge taxes. A worldwide report requires a company to report their total, global profits, and the portion of that overall business done in a given jurisdiction. If a state makes up 2 percent of a company’s global business, then 2 percent of their taxable profit would be subject to the state’s tax rate. Worldwide Combined Reporting is the most comprehensive and effective tool to address tax haven abuse that states have.
- Extend Domestic Formula to Include Known Tax Havens. Also known as the Tax Haven List approach, this reform mandates that companies include their U.S. profits held in offshore tax havens when calculating taxes. In many states, companies calculate their tax liability based on their income held in subsidiaries incorporated within the water’s edge (within the United States). By declaring a statutory list of tax havens, states can tax corporate profits held in offshore tax havens.
Montana and Oregon passed laws that curb offshore tax haven abuse and collected some millions of dollars in tax revenue that otherwise would be lost, though Oregon has since repealed this rule. Montana continues to treat a proportionate share of the income that corporations book to known tax havens as domestic income for state tax purposes.
Using the Tax Haven List approach allows Montana to collect more than $8 million per year in corporate taxes that would have otherwise gone uncollected.3
After Oregon passed similar reforms in 2013, which raised $28.4 million in additional revenue in 2014, legislators repealed the rule in 2018 under pressure from corporate lobbying.4 5 Now, Oregon is considering the more comprehensive approach with new legislation to require Worldwide Reporting to improve their ability to apply taxes fairly to all types of businesses.6
Enacting Worldwide Combined Reporting or Complete Reporting in all states, this report calculates, would increase state tax revenue by $17.04 billion dollars. Of that total, $2.85 billion would be raised through domestic Combined Reporting improvements, and $14.19 billion would be raised by addressing offshore tax dodging (see Table 1). Enacting Combined Reporting and including known tax havens would result in $7.75 billion in annual tax revenue, $4.9 billion from income booked offshore.
Local businesses tend not to hide their profits with complex international tax schemes, but they do compete against other businesses who exploit those loopholes. Enacting Worldwide Combined Reporting would even the playing field in addition to generating critical revenue.
Every person and every corporation in America benefits from government services—from schools to paved roads to courts and public health. When it comes to paying the tab, we need to make sure the rules are applied evenly and fairly, but even though all of America’s corporations use government services, some avoid paying taxes for them by moving their profits into offshore havens—a scheme that is not available to smaller competitors.
The practice of exploiting tax havens is unfair to wholly-domestic businesses in addition to straining federal and state budgets, the latter of which mostly do not have the option of running up debt year to year. Twenty-five states faced budget shortfalls in 2018, and some of those have deep structural deficits.7
In Oregon, a bi-annual deficit of $1.7 billion has put pressure on public priorities. Meanwhile, in Illinois, large structural problems caused by years of budget woes have undercut long-term planning around mission-critical state programs like education and mental health.
Dr. Kimberly Clausing of Reed College released findings in October of 2018 that American companies will continue to shift $298.9 billion per year of income out of the country under new tax rules passed in 2017,8 reducing what companies pay in federal income taxes by $59.8 billion each year. 9
Since corporations pay state income taxes largely based on their federally defined taxable income, these revenue losses hurt states as well. Federal legislation to address tax haven abuse has failed to move forward and the recently enacted “Tax Cuts and Jobs Act” (TCJA) failed to substantially reduce the cash booked offshore.10 Meanwhile, innovative states are advancing new methods to collect taxes—which are rightfully owed—on these profits held offshore. If these changes had been adopted by all states, a total of $17.04 billion in additional revenue would have been generated in 2018.
The following pages are a roadmap for how all states can collect taxes that are due on corporate profits held in offshore havens, and an assessment of the benefits states would enjoy by doing so.
How States Have Developed Methods to Tax Complex Companies Fairly
States have long striven to accurately tax large, complex multi-jurisdictional businesses. One early example of such a complex business was the railroad industry in the nineteenth century. An individual tract of land with a small amount of wood, steel rail and iron on it isn’t worth all that much: its role in the larger rail system provides the real value. To prevent companies from downplaying their assets, states pushed to look at the whole picture of business activity across multiple states. In addition, to prevent businesses from operating as many different connected corporations to game the rules, states required companies to combine the different subsidiary corporations into a unitary business filing.
The Supreme Court ruled in favor of these approaches, permitting states to look at the business in its entirety—its subsidiaries and activity across many states. The Supreme Court likewise allowed states to create a formula to determine the appropriate portion of business attributed to the state. 11 In the case of railroads, a state could calculate the percentage of business in the state using the percentage of the company’s tracks in that state. This approach became known as “Combined Reporting” using “formulary apportionment.”
Combined Reporting helps states limit the ability of corporations to exploit domestic tax dodging schemes such as the Delaware loophole and real estate investment trusts based in the United States (see “Domestic Schemes for Dodging State Taxes,” page 5). Since a majority of states with corporate income taxes already require Combined Reporting, most multistate companies already prepare combined reports and administration is relatively straightforward. All states using the same Combined Reporting system would likely reduce tax preparation time.
In the 1970s and 1980s, as businesses grew more complex, increasingly multinational instead of just multi-state, states began exploring how to grow their Combined Reporting systems to apply to income booked offshore. Worldwide Combined Reporting includes income from all subsidiaries of multinational corporations, whereas domestic Combined Reporting ignores everything that happens beyond the “water’s edge.”
States are not allowed to tax corporate profits legitimately made in other states or foreign countries, but the purpose of Worldwide Reporting is not to tax foreign income. Worldwide Reporting aims to prevent shifting of income that states have a right to tax. In 1983, the U.S. Supreme Court affirmed this view on Worldwide Reporting in Container Corporation of America vs. Franchise Tax Board. The Court held the interdependence of economic activity, asserting that there is no objective way to calculate where each dollar of income is made in businesses operating in several jurisdictions, and that states have a right to require unified Worldwide Reporting.12
There was considerable opposition to unified world reporting, and some corporations lobbied for help from the Reagan White House. Unfortunately, multinational lobbying succeeded in pushing states to move away from the Worldwide Combined Reporting system in favor of allowing companies to opt to exclude any income generated beyond the water’s edge from taxation.13
Loopholes That Allow Profit-shifting to Tax Havens Cost States Billions of Dollars
The core of the problems faced by states in collecting corporate taxes is the use of tax havens to reduce taxable profits.
Tax havens are countries or jurisdictions with very low or nonexistent taxes—often small island nations like Bermuda, the Cayman Islands and Seychelles—to which firms transfer their earnings to avoid paying taxes in the United States.14 According to CBO estimates, under updated rules, companies will continue to shift $235 billion in profits offshore each year to avoid taxes.15 Prior to the enactment of the new tax rules, Fortune 500 companies managed to accumulate $2.6 trillion in untaxed profits offshore on which they were avoiding over $750 billion in U.S. taxes.16
With their armies of tax lawyers and accounting specialists, companies have many strategies for booking profits offshore. Some transfer their patents or trademarks to subsidiaries located in tax havens and spend their domestically earned income to pay tax-deductible royalties to the subsidiary to use the patents or trademarks in America. Other companies engage in “earnings stripping” in which companies in the United States borrow money from subsidiaries in a tax haven and then deduct their interest payments from their taxable income.17
Offshore tax haven abuse has been a point of conflict in the debate over federal tax reform for years, but states are also affected because their tax codes are closely tethered to the federal one. To reduce the cost of enforcement and compliance, states calculate taxes using similar definitions of income as those used at the federal level,18 meaning that when corporations do not report income to the federal government, it typically goes unreported to the states, too.
In 2018, offshore tax dodging cost states $14.19 billion in lost tax revenue. California lost the most, at $2.8 billion, while New York and Illinois each lost more than $1.3 billion. In all, 32 states lost more than $100 million to offshore tax dodging that year (See Table 2).
Since most states have balanced budget requirements, every dollar of state revenue that is lost to offshore tax havens must be made up elsewhere, either through cuts to spending on state services and infrastructure, or higher taxes on ordinary taxpayers.19
As states see a backlash against education funding cuts, highlighted by the 2018 teacher demonstrations in Arizona, Kentucky, North Carolina, Oklahoma and Colorado, there is increasing pressure to find equitable and popular revenue sources.20
States, Including Montana and Oregon, Take New Action to Address Tax Havens
As states continue to face budget pressure, and comprehensive reform on offshore tax dodging has not materialized on the federal level, states have taken matters into their own hands. Montana and Oregon have enacted Tax Haven List reform, targeting profits booked to known offshore tax havens.
Montana was the first to adopt this approach in 2003. In a bill that garnered broad bipartisan support in the state Legislature, Montana’s lawmakers required companies with subsidiaries in certain foreign tax havens to include those profits in their combined reporting.21 The law also requires the Montana Department of Revenue to provide the state legislature with a biennial review and recommendation of additional countries to include on the state’s formal list of tax havens. 22
The Tax Haven List approach has helped Montana restore some equity to its corporate tax system and limit abuse of offshore tax havens, saving Montana’s ordinary taxpayers millions. A fiscal note to the state Legislature calculated that by addressing the use of specific tax havens, Montana would collect $4.4 million in additional revenue in the fiscal year 2014, climbing up to $8.9 million in the fiscal year 2017. 23
In July 2013, Oregon became the second state to enact Tax Haven List reform. Following in Montana’s footsteps, Oregon passed a bill with almost unanimous legislative support identifying specific foreign tax havens that must be accounted for in a corporation’s combined report. As in Montana, corporations with subsidiaries in particular tax havens would be required to include net income from those locations on their in-state tax returns.24
Unfortunately, the Oregon reforms were repealed in 2018, costing the state $20 million in expected tax revenue.25 The list of tax haven countries in the statute caused lobbying from listed nations as well as from affected companies, represented by The Council On State Taxation—an industry lobbying operation representing more than 600 corporations.26 Connecticut, Rhode Island, West Virginia and the District of Columbia have also passed rules which allow their tax collectors to determine whether a country should be listed as a tax haven, but lobbying has also limited the impact of these reforms.27
Over the last five years, a number of other states have considered similar legislation. In Massachusetts, a bipartisan group of 57 legislators backed a Tax Haven List bill, and thousands of residents weighed in to support it.28 29 In Colorado, a bill to tax income booked to tax-havens passed the House, before being stalled in the Senate.30 In 2016, legislators in Maine, Minnesota, Kansas and Kentucky also had active bills in consideration.31
In most of these states, there was formal opposition from multinational corporations as well as from foreign governments who found their countries listed on the tax haven list. Oregon is now exploring the Worldwide Combined Reporting approach, which has the benefit of not being controversial abroad.32
The Need for Federal Action on Tax Havens
While states can and should take action to curb tax haven abuse, even more revenue is being lost to offshore tax avoidance on the federal level. While many lawmakers promised that the Tax Cuts and Jobs Act would significantly reduce offshore tax avoidance, the Joint Committee on Taxation found that rather than increasing revenue, the permanent international provisions of the legislation will reduce revenue by $14 billion over the next 10 years.33
One potential avenue for reducing international tax avoidance and recapturing lost revenue would be to enact a worldwide tax system, wherein U.S. companies pay the same tax rate on their domestic and offshore income.34 Equalizing the rates means eliminating special deductions for offshore income under the Tax Cuts and Jobs Act, such as the 50 percent deduction on global low-taxed intangible income (GILTI). It would also require reforms that address corporate inversions and close other tax loopholes that benefit foreign companies operating in the United States.
Another approach would be to abandon the reliance on profit shifting limitation legislation such as variations of the Tax Cut and Jobs Act and adopt on the federal level the formulary apportionment method used currently on the state level. In other words, the federal government would calculate a company’s taxable income by apportioning its global income based on factors, such as the company’s sales, payroll, and assets based in the United States (most states use sales-emphasized formulas).35
When California passed sales factor apportionment by state initiative, many corporations opposed it because it would have increased many corporations’ tax burdens.36 Some believe the United States would benefit from a single sales factor approach.37 Under such a system, if a company’s shareholder reports show 60 percent of its global sales in the United States, then 60 percent of its global pre-tax income would be taxable in the country. Domestic businesses have expressed support for a better method of taxing business activity in U.S. markets regardless of corporate domicile.38
A thorough examination of these options should be considered in any future federal legislation to combat the present loss of American corporate tax revenues and level the playing field for domestic and multinational businesses.
States Can Limit or Eliminate Offshore Tax Dodging by Updating Tax Codes
In order to address tax shifting by complex multi-jurisdictional businesses, states can enact Combined Reporting, and then expand it to address offshore tax haven abuse by requiring Worldwide Reporting for multinational businesses. Alternatively, they can include income booked to specific tax havens by passing Tax Haven List legislation, though this approach captures less revenue.
Additional States Enacting Combined Reporting Reform Would Generate $2.85 Billion
Combined Reporting is a critical first step to addressing profit shifting into low-tax jurisdictions. This system is already in place in 27 states and the District of Columbia. When companies are not asked to combine their activities across related subsidiaries and apportion their profits based on relative business activity state-by-state, there is a strong incentive to shift domestic profits to zero-tax states such as Nevada and Wyoming. If the 18 states which tax corporate profits but do not currently use Combined Reporting were to enact these reforms it would have added $2.85 billion in state tax revenue in 2018 (see Table 3).
Combined Reporting formulas can vary from state to state. A sample bill enacting Combined Reporting can be found in Appendix A.
Worldwide Combined Reporting Approach Would Add Another $14.19 Billion to State Budgets
After a Combined Reporting system is in place for domestic business activity, there remains a strong incentive for businesses to book profits to offshore subsidiaries located in tax havens. The most fair, accurate and simple way to reduce profit shifting is to take the whole picture into account—the total profit of the combined worldwide business—to determine the portion of worldwide profit earned in the jurisdiction in question.
This approach, Worldwide Combined Reporting, will be introduced in Oregon this year. Remnants of Worldwide Combined Reporting exist in other states, but are not compulsory. California, Idaho, Montana and North Dakota require companies to file Worldwide Combined reports, unless companies elect to file a “water’s edge” report.39 In essence, these states offer a loophole that allows corporations to escape the Worldwide Combined Reporting requirement.40 In North Dakota, for instance, corporations are nominally required to report their worldwide income, but can elect to report only income up to the water’s edge in exchange for paying a slightly higher tax rate.41 Alaska requires Worldwide Combined Reporting for oil companies only.42
Worldwide Combined Reporting is considered the gold standard for closing tax loopholes—and our report finds it would raise nearly three times more revenue than other options, revenue currently lost to tax avoidance.
To enact this approach, the state must:
- Require corporations to include the income of all foreign subsidiaries. Many corporations are already required to file information about the income of all their foreign subsidiaries with the federal government on IRS Form 5471. State tax agencies could simply add a line to their tax forms requiring corporations to file the same federally reported information with states.
- Apply the state’s apportionment formula to determine the share of reported profits it will tax. States do not levy taxes on the total income of a corporation because if they did, corporations that do business in multiple states would see their entire profit taxed multiple times. To determine which portion of corporate income is attributable to the state, some use an apportionment rule that considers the portion of national sales, payroll and property that are located in the state. Others use a similar rule but give extra weight to in-state sales. Some states use the so-called single sales factor (SSF) rule that considers only the share of sales the corporation makes in the state.43
How to Enact Tax Haven List Reform
While Worldwide Combined Reporting was sharply debated in the 1980s, including income booked to known tax havens in the Combined Reporting calculation was a point of relative consensus.44 For those states unwilling to embrace the more comprehensive approach of Worldwide Combined reporting, an alternative to getting back some of the lost revenue could be to follow the path laid by several states in enacting legislation to list known tax havens, and tax profits booked there.
In addition, both states with Tax Haven List legislation and those considering enacting it should expand the set of tax haven countries that have typically been included in state lists. Our analysis of IRS data looking at where corporations report their profits found that including Ireland, the Netherlands, Switzerland, Hong Kong, and Singapore—all known tax havens—could more than double the effectiveness of Tax Haven List legislation (see Table 4). We estimate that every state enacting a tax haven list based on the weaker lists would raise approximately $1.95 billion in revenue. In contrast, all states enacting a stronger tax haven list would raise $4.9 billion.
Tax Haven List reform can be done by passing legislation to target income booked to tax havens for states that already have a Combined Reporting system. To do so, states must:
- Determine a list of tax haven countries for state tax purposes that is updated regularly. Nonpartisan entities such as the National Bureau of Economic Research, the Organization for Economic Cooperation and Development (OECD), and the Internal Revenue Service have compiled similar lists of tax havens based on common characteristics, eliminating the need for state officials to develop expertise on foreign tax regimes. These lists have been cited in studies on tax havens by the nonpartisan Government Accountability Office and the Congressional Research Service. Reviews of tax havens conducted by the Montana Department of Revenue in 2010 and 2012 also provide a broad review of tax haven studies that can benefit other states. There is considerable disagreement around who gets named a tax haven, and having a weaker list significantly reduces the revenue gains.
- Require corporations to include the income of foreign subsidiaries based in state-identified tax havens on their state tax returns. Similarly to Worldwide Combined Reporting, state tax agencies could simply add a line to their tax forms requiring corporations to file with states the same information on subsidiaries based in state-identified tax havens they report federally.
- Calculate the income subject to taxation based on the sum of domestic and tax haven income.
- Apply the state’s typical apportionment formula to determine the share of reported profits it will tax.
All States Should Close Tax Loopholes and Even the Playing Field
If all states that tax corporate profits moved to a Worldwide Combined Reporting or Complete Reporting system, they would collect $17.04 billion, level the playing field for businesses, and eliminate incentives for companies to relocate or establish subsidiaries overseas.
The likely amount of additional revenue each state would collect varies based on: whether they have enacted reforms that limit tax dodging already; (2) the total corporate taxes collected; (3) the state corporate income tax rate; and (4) the portion of gross state product.
In every state, the revenue raised would make a difference in meeting spending priorities or deciding whether or not to raise taxes and fees for residents.
As has happened so many times before, state-level initiatives may turn out to be the most effective way to induce federal lawmakers to overcome partisan and lobbying pressures to take action, potentially triggering federal action that can address parts of the problem states cannot.
Estimating the Potential Revenue to Be Gained Through Worldwide Combined Reporting
The starting point for the estimate on how much revenue is lost in the states due to offshore tax avoidance, and thus could be gained through Worldwide Combined Reporting (also known as Complete Reporting), is the Congressional Budget Office’s (CBO) recent estimate that after the passage of the Tax Cuts and Jobs Act (TCJA), U.S. companies will continue to avoid taxes on $235 billion in profits shifted offshore annually.45 This figure represents the pool of income that would be recaptured under Worldwide Combined Reporting. The CBO estimate represents a midpoint estimate between figures estimated recently in a report by Professor Kimberly Clausing, who put the figure closer to $300 billion,46 and another report by Professor Gabriel Zucman, who put the figure at $142 billion.47
The next step in making our state-by-state estimates of the potential revenue gain was to allocate the $235 billion in shifted profits to each state. First, we allocated 16.2 percent of the shifted profits to those states (Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming) without a traditional corporate income tax. The 16.2 percent figure represents these states’ average proportion of gross state product from 2013-2017. Second, for those states with a corporate income tax, we divided the amount of corporate income tax revenue collected at the top marginal corporate tax rate in each year from 2013-2017 to get an estimate of taxable corporate income in each state. We then averaged the taxable income estimate for each state over those five years and divided it by the total five-year average of income across all the states to determine the proportion of the shifted profits that should be allocated to each state.
Unfortunately, no reliable dataset exists that allocates corporate profits by state, so this implied income calculation served as a way of approximating the proportion of corporate profits in each state. Third, we multiplied the estimated proportion of profits shifted to each state by that state’s top marginal corporate tax rate. Finally, for those five states (Alaska, Connecticut, Montana, Rhode Island and West Virginia) and the District of Columbia where some form of Tax Haven List legislation exists, we subtracted our estimate for the revenue gained in those states from having a weak tax haven list (the methodology of which is discussed below).
To explain how this worked, it may be illuminating to walk through an example. According to our calculation, California’s average proportion of implied corporate income was 16.1 percent. We multiplied this 16.1 percent by $196,954,031,789, the amount of profits shifted minus the 16.2 percent of these profits allocated to states without traditional corporate income taxes. The result was that we estimated that $31,647,725,252 in corporate profits are shifted out of California each year. To get the estimate of how much returning these profits to California through Worldwide Combined Report would raise, we simply multiplied that figure by California’s 8.84 percent top marginal corporate tax rate. This calculation concludes that Worldwide Combined Reporting in California would raise $2,797,658,912. Given that these calculations are estimates, we then rounded all the numbers to the millions, in this case estimating that Worldwide Combined Reporting would raise $2,798,000,000 in revenue for California.
Estimating the Potential Revenue to Be Gained Through Domestic Combined Reporting
For those 18 states that have a traditional corporate income tax, but do not currently have any form of Combined Reporting, it was critical to estimate the impact of Combined Reporting on the domestic level, in addition to the impact of the provision on the international level. We estimate that each state without domestic Combined Reporting would see a 20 percent increase in revenue from the change. The 20 percent figure is based on state government-conducted studies looking at the potential impact of Combined Reporting in Maryland and Rhode Island.48 49 Those studies found that applying a strong version of Combined Report (referred to as Finnigan Combined Reporting) could raise revenue in those states by 30 percent or more in a given year. The studies also showed that unfavorable economic conditions could, in some years, dampen the revenue raised. Given the variety of companies in individual states, the different apportionment formulas states have, and the potential import of negative economic conditions, we settled on the conservative estimate that the amount of revenue raised would be 20 percent, substantially lower than the percent increase in most years found by the Rhode Island and Maryland studies.
Estimating the Potential Revenue to Be Gained Through Strong and Weak Tax Haven List Legislation
We calculated the effect of Tax Haven List legislation based on an average of the revenue increases seen in states that have implemented such legislation and from estimates in several states considering adoption of the legislation. Specifically, we took a weighted average of the revenue raised from the tax haven legislation in Oregon and Montana and the projected revenue increases from proposed legislation in Maine, Colorado and Kentucky. This approach found that states on average would see an increase in revenue of 4.5 percent. We believe that this estimate is conservative considering that the two estimates based on real collections, Oregon and Montana, show an increase in revenue of 6 and 8 percent respectively, while the states that projected future revenues estimated increases only in the 3 to 4 percent range.
To estimate the impact of strengthening the tax haven list, we used data from the IRS on the geographic distribution by country of U.S. controlled foreign corporation income. These data reveals that adding Hong Kong, Ireland, the Netherlands, Singapore and Switzerland (all of which are currently excluded from tax haven lists as implemented) to the tax haven lists would increase the pool of income by 245 percent. Given this fact, we estimate that the percent increase in revenue from a strong tax haven list would be 11 percent—nearly 2.5 times the 4.5 percent raised by the weak list.
For those five states and the District of Columbia that have some form of tax haven legislation already, we assume across the board that adopting the weak list approach will not generate any additional revenue. In addition, in calculating the amount each of these jurisdictions would raise from a strong tax haven list, we subtract the 4.5 percent increase from the weak tax haven list already in place.
Given that Montana is the only state that currently employs the tax haven list approach and has a recent, robust estimate for how much it raises, we opted to use its estimate of $8.9 million as the starting point for its weak and strong tax haven list estimates, rather than a 4.5 percent increase in its tax revenue.
Endnotes & Citation
1 While the Tax Cuts and Jobs Act (TCJA) has some mechanisms aimed at tackling offshoring, analysis of the impact of the tax plan shows that it increases certain incentives for offshoring overall. Most importantly, it allows multinational companies to pay a substantially lower tax rate on profits and operations offshore. Richard Phillips, “How to Fix the Broken International Corporate Tax Code,” ITEP, July 17, 2018.
2 Maria Koklanaris, “More States Move To Combined Reporting Despite Biz Pushback,” Law 360, August 21, 2018. https://www.morganlewis.com/-/media/files/news/2018/law360-more-states-move-to-combined-reporting-despite-biz-pushback-21aug18.ashx
3 Fiscal Note, HB 0578, Montana Department of Revenue, 2015 Biennium. In this Fiscal Note, it is estimated that, in Fiscal Year 2017, repealing the tax haven list would cost $8,941,271 in lost revenue.
4 “Legislature leaves Oregon largely defenseless against corporate abuse of tax havens,” Oregon Center for Public Policy, June 5, 2018. https://www.ocpp.org/2018/06/05/tax-haven-corporate-abuse-oregon/
5 Paul Shukovsky, “Oregon Tax Haven Blacklist Repealed, One State List Left,” Bloomberg BNA, April 12, 2018. https://www.bna.com/oregon-tax-haven-n57982091081/
6 Daniel Hauser, “Oregon Can Raise $376 Million by Clamping Down on Offshore Corporate Tax Avoidance,” Oregon Center for Public Policy, November 15, 2018.
7 Ryan Maness, “Twenty-Five States Face Revenue Shortfalls in 2018,” MulitiState Insider, Jan. 9, 2018. https://www.multistate.us/blog/twenty-five-statesface-revenue-shortfalls-in-2018
8 Kimberly A. Clausing, “Profit Shifting Before and After the Tax Cuts and Jobs Act,” Reed College Department of Economics, Oct. 29, 2018. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3274827
9 Richard Phillips, “Post-TCJA, International Corporate Tax System Still Leaking Hundreds of Billions in Profits,” ITEP, Nov. 5, 2018. https://itep.org/post-tcja-international-system-still-leaking-hundreds-of-billions-in-profits/
10 Gary Kalman, “A taxing headache from Congress,” The Hill, April 17, 2018. https://thehill.com/opinion/finance/383593-a-taxing-headache-from-congress
11 Adams Express Co. v. Ohio State Auditor, 165 U.S. 194 (1897); State Railroad Tax Cases, 92 U. S. 575 (1875); The Delaware Railroad Tax Case, 18 Wall. 208 (1873).
12 Container Corp v. FTB, 463 U.S. 159, 170 (1983).
13 Office of the Secretary, Department of the Treasury, The Final Report of the Worldwide Unitary Taxation Working Group: Chairman’s Report and Supplemental Views, August 1984.
14 Jane G. Gravelle, “Tax Havens: International Tax Avoidance and Evasion,” National Tax Journal 62(4): 727-753, December 2009.
15 “The Budget and Economic Outlook: 2018 to 2028,” Congressional Budget Office, April 2018. https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53651-outlook.pdf
16 “Offshore Shell Games 2017,” ITEP and U.S. PIRG Education Fund, October 2017. https://itep.sfo2.digitaloceanspaces.com/offshoreshellgames2017.pdf
17 Lynnley Browning, “Tax Rule Aimed at Corporate ‘Earnings Stripping’ Under Review,” Bloomberg, July 7, 2018. https://www.bloomberg.com/news/articles/2017-07-07/tax-rule-aimed-at-corporate-earnings-stripping-under-review
18 States have a history of decoupling from the federal tax code when it is to their benefit. For example, after the federal government began phasing out the estate tax, 13 states and the District of Columbia decoupled from the federal government’s tax code to continue collecting revenue through the estate tax. For more, see Elizabeth C. McNichol, Center on Budget and Policy Priorities, Many States Are Decoupling from the Federal Estate Tax Cut, 28 March 2006.
19 National Conference of State Legislatures, NCSL Fiscal Brief: State Balanced Budget Provisions, October 2010.
20 Matt Pearce, “Red-state revolt continues: Teachers strike in Oklahoma and protest in Kentucky,” The Los Angeles Times, April 2, 2018.
21 Montana law currently identifies the following tax havens: Andorra, Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica, Gibraltar, Grenada, Guernsey-Sark Alderney, Isle of Man, Jersey, Liberia, Liechtenstein, Luxembourg, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Netherlands Antilles, Niue, Panama, Samoa, San Marino, Seychelles, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos Islands, U.S. Virgin Islands, and Vanuatu, per Montana Code Annotated §15-31-322 (1)(f)
22 “‘Tax’ Is Not a Four-Letter Word: Ideas for a More Progressive Taxation System in Montana,” The Policy Institute, January 2012.
23 Ibid Note 3, Montana Department of Revenue
24 Maria Koklanaris, “Oregon’s New Tax Haven Law Expected to Pad State Coffers, Says DOR Official,” Tax Analysts, 9 October 2013.
25 “An Assessment of Oregon’s Listed Jurisdiction Policy and its Cost Effectiveness,” Oregon Legislative Revenue Office, March 2017.
26 Ibid 5, Paul Shukovsky.
27 Ibid 5, Paul Shukovsky.
28 Colleen Quinn, “Report: Closing loophole could add
$79M in tax revenue,” Lowell Sun,April 14, 2015. http://www.lowellsun.com/breakingnews/ci_27910971/report-closing-loophole-could-add-79m-tax-revenue#ixzz5ZN9KW1Pr
29 “OFFSHORE TAX HAVENS COST AVERAGE MA TAXPAYER $1,886 A YEAR, MA SMALL BUSINESS $6,269,” MASSPIRG, April 15, 2014. https://masspirg.org/news/map/offshore-tax-havens-cost-averagema-taxpayer-1886-year-ma-small-business-6269
30 Jerd Smith, “Tax haven bill dies in Colorado Senate,” Boulder Daily Camera, March 29, 2016. http://www.dailycamera.com/boulder-business/ci_29700682/tax-haven-bill-dies-colorado-senate
31 Jennifer McLoughlin, “Reaching for Revenue Offshore, States Push Tax Haven Laws,” Bloomberg Business, April 13, 2016. https://www.bna.com/reaching-revenue-offshore-n57982069777/
32 Daniel Hauser, “Oregon Can Raise $376 Million by Clamping Down on Offshore Corporate Tax Avoidance,” Oregon Center for Public Policy, Nov. 15, 2018. https://www.ocpp.org/2018/11/15/complete-reporting-worldwide-corporations/
33 “Estimated Budget Effects Of The Conference Agreement For H.R.1, The “Tax Cuts And Jobs Act,”” Joint Committee on Taxation, Dec. 18, 2017.
34 Richard Phillips, “How to Fix the Broken International Corporate Tax Code,” ITEP, July 17, 2018.
35 Federation of Tax Administrators, State Apportionment of Corporate Income, Feb 2018. https://www.taxadmin.org/assets/docs/Research/Rates/apport.pdf
36 George Skelton, “Prop. 39 would end tax giveaway, raise $1 billion for California,” Los Angeles Times. Oct. 10, 2012. http://articles.ltimes.com/2012/oct/10/local/la-me-cap-prop39-20121011
37 Bill Parks, “A Better Alternative for Corporate Tax Reform,” Tax Notes. Vol.157 No. 11. P 1591-1594. December 11, 2017.
38 Michael Stumo, “The Progressive Tax Reform You’ve Never Heard Of,” American Prospect, Oct. 27, 2016. http://prospect.org/article/progressive-tax-reformyou%E2%80%99ve-never-heard
39 Darien Shanske, “White Paper on Eliminating the Water’s Edge Election and Moving to Mandatory Worldwide Combined Reporting,” University of California, Davis, School of Law, August 2, 2018. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3225310
40 Additionally, Alaska requires worldwide combined reporting but only for oil, gas and pipeline companies, per William F. Fox and LeAnn Luna, National Conference of State Legislatures Task Force on State & Local Taxation of Communications and Interstate Commerce, Combined Reporting Notes 27 with the Corporate Income Tax: Issues for State Legislatures, November 2010.
41 Michael S. Schadewald, “State Taxation of U.S.-Controlled Foreign Corporations: How Big Is the Tax Bite?” International Tax Journal, September-October 2010:7382.
42 William F. Fox and LeAnn Luna, National Conference of State Legislatures Task Force on State & Local Taxation of Communications and Interstate Commerce, Combined Reporting Notes 27 with the Corporate Income Tax: Issues for State Legislatures, November 2010.
43 “Corporate Income Tax Apportionment and the ‘Single Sales Factor,’” Institute on Taxation and Economic Policy, August 2012. In addition, a small handful of states use custom three-factor formulae that specify the weight to be attributed to each factor. In all cases these give, by far, the largest weight to in-state sales and, in the interest of simplicity and conservatism, are treated as SSF formulae in this paper. States with custom apportionment formulae for some or all of their businesses in 2012 were Arizona, Minnesota, New Jersey, Ohio and Pennsylvania, per Judith Lohman, Connecticut General Assembly, Office of Legislative Research, OLR Research Report: Corporation Tax Income Apportionment Formulae, 26 September 2012.
44 “The Final Report of the Worldwide Unitary Taxation Working Group: Chairman’s Report and Supplemental Views,” Office of the Secretary, Department of the Treasury, August 1984.
45 “The Budget and Economic Outlook: 2018 to 2028,” Congressional Budget Office, April 2018. https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53651-outlook.pdf
46 Kimberly A. Clausing, “Profit Shifting Before and After the Tax Cuts and Jobs Act,” Reed College Department of Economics, Oct. 29, 2018. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3274827
47 Thomas R. Tørsløv, Ludvig S. Wier, Gabriel Zucman, “The Missing Profits of Nations,” National Bureau of Economic Research, July 2018. http://gabriel-zucman.eu/missingprofits/
48 “Corporate Income Tax Study,” Comptroller of Maryland, March 3, 2009. https://finances.marylandtaxes.gov/Where_the_Money_Comes_From/Mandated_ Reports-Studies/Corporate_Income_Tax_Study.shtml
49 “Tax Administrator’s Study Of Combined Reporting,” State of Rhode Island, Department of Revenue and Taxation, March 15, 2014. http://www.tax.ri.gov/Tax%20Website/TAX/combinedreporting/Rhode%20Island%20Division%20of%20Taxation%20–%20Study%20on%20Combined%20Reporting%20–%2003-14-14%20FINAL.pdf
50 United States Government Accountability Office, Company Formations: Minimal Ownership Information Is Available or Collected, April 2006.
51 “Closing State Corporate Tax Loopholes: Combined Reporting,” Institute for Local Self-Reliance, June 2, 2010, downloaded from www.ilsr.org; Jesse Drucker, “Wal-Mart Cuts Taxes by Paying Rent to Itself,” The Wall Street Journal, Feb. 1, 2007. Some states have closed this tax-free loophole for captive real estate investment trusts, and combined reporting often corrects this problem provided that the trusts are U.S. companies.
52 “Small Business Owners Want Fair Tax System Over Tax Cuts,” Small Business Majority, Oct. 26, 2017. http://www.smallbusinessmajority.org/our-research/taxes-budget-economy/small-business-owners-want-fair-tax-system-over-tax-cuts
53 Ibid 52, Small Business Majority
54 “TAX ANNEX TO THE SAINT PETERSBURG G20 LEADERS DECLARATION” (PDF). St Petersburg Tax Annex OECD. September 2013. http://www.mofa.go.jp/files/000013928.pdf
55 “OECD’s BEPs measures seriously flawed,” economia, Dec. 9, 2016. https://economia.icaew.com/news/december-2016/oecds-beps-measures-seriously-flawed
56 “Treasury Official Explains Why U.S. Didn’t Sign OECD Super-Treaty”. Bloomberg BNA. 8 June 2017. https://www.bna.com/treasury-official-explains-n73014453413/