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Report: Tax-avoidance strategies cost Minnesota $2 billion a year

Minnesota loses nearly $2 billion a year in tax revenue due to some of the state’s major corporations and wealthy individuals moving their earnings to tax havens, a new report found.

Tax havens are countries or jurisdictions that have very low or nonexistent taxes; that group includes Switzerland, Belize, Bermuda, and the Cayman Islands.

The report, titled “The Hidden Cost of Offshore Tax Havens” and compiled by Boston-based advocacy group U.S. PIRG Education Fund, found that the state’s $1.95 billion yearly loss in tax revenue is the sixth-largest among all states. California, with yearly tax losses estimated at $7.1 billion, topped the list, followed by New York ($4.3 billion), New Jersey ($2.8 billion), Illinois ($2.5 billion), and Pennsylvania ($2.1 billion).

Corporations account for nearly $1.3 billion of Minnesota’s yearly losses, while individual taxpayers account for about $629 million, the report said.

Income earned by foreign subsidiaries of companies based in the United States is not subject to U.S. federal and state taxes until the money is returned to the country. As a result, many companies adopt strategies to avoid paying U.S. taxes and reduce their overall tax liability, according to PIRG. These strategies include establishing subsidiaries in tax havens and transferring income sources such as patents to those subsidiaries. Individuals, meanwhile, can set up offshore shell corporations or trusts to dodge U.S. taxes, the report said.

Minnesota’s five largest public companies based on revenue—3M, Best Buy, Supervalu, Target, and UnitedHealth Group—collectively had 46 subsidiaries located in tax havens as of 2008, according to the report. And 83 of the 100 largest public companies in the country had subsidiaries located in tax havens as of 2008, PIRG found.

Tax havens cost state governments across the country nearly $39.8 billion in 2011. Of that total, corporations were responsible for $26 billion in lost revenues.

The report suggests that states can avoid losing revenue by adopting tax reforms, including treating parent companies and their subsidiaries around the world as one company for tax purposes.

Twin Cities BusinessMinnesota Governor Mark Dayton last month proposed a series of tax reforms, including eliminating what he calls “unfair corporate tax loopholes” such as “foreign royalty subtractions” currently enjoyed by certain businesses. According to a Star Tribune report, the proposed reforms, which are part of the governor’s biennial budget proposal, include terminating tax breaks that companies with overseas profits receive when they bring the money back to the United States.

U.S. PIRG Education Fund is a nonprofit organization whose mission is to “investigate problems, craft solutions, educate the public, and offer meaningful opportunities for civic participation.” The organization said it analyzed data from the Internal Revenue Service in compiling its report.

This article is reprinted in partnership with Twin Cities Business.

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