Minnesota leads all 50 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 50 states in terms of 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 No. 1. The per capita loss through tax havens in Minnesota is 14 percent higher than the next closest state (New Jersey).
Firms avoid paying fair share
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.”
Sen. Scott Dibble and Rep. 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 affect 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.
Only some taxes would be shifted to others
During the Tax Reform Division hearing on this bill, Sen. 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 Cayman Islands.
Profits exceed entire GDP
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 fairer while at the same time generating needed revenue to help balance the state budget.
Jeff Van Wychen is a Fellow and Director of Tax Policy & Analysis at Minnesota 2020, a nonpartisan think tank based in St. Paul. This article originally appeared on its website.
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offshore tax
Minnesota taxes are too high. take a look at the highest taxing states(above)the people and corporations in those states are using tax havens. if we lowered our taxes, those would not go offshore.
and don’t give me this b s about paying their fair share. because they are making more income, they are paying more than their fair share.
lower the tax rate and MN will be better off.
taxes
Jeff, you need to start your own business and also study Reaganomics.
“the power to tax is the power to destroy”
Indeed, Any Power Someone Else Has
to extract money from your pocket, when you have no choice but to give up that money,…
is “the power to destroy.”
But this includes far more than the taxes levied by our various governments, whose tax levies in recent years have come nowhere close to destroying anyone (and have been dropping as a share of GDP for the last few decades),…
but also includes those providing goods and services that we can’t live without or can’t easily get by without,…
not because of the expenses they incur in providing those goods and services but simply in order to keep profits unreasonably high and, thereby, to compensate their executives in ways far beyond any level commensurate with the contribution those executives have made to society or to the company.
Most Americans pay far MORE than they realize in these “private” taxes to the rentier class – pay far more to their bankers, those who manage their retirement investments, those who provide fuel for their vehicles, etc., than they suspect, even as we also pay public taxes to protect, assist and bail out those companies that, except for their own mismanagement, should be able to sustain themselves without such assistance.
The difference, and it is VERY IMPORTANT is that public taxes go substantially to provide for the common good. “Private taxes” are generally removed from the economy and invested in non-productive ways (in terms of job creation, innovation, new enterprises, etc.) ways which LOWER the overall well being of our fellow citizens, our society, and our nation.
When I Sent An E-mail to My Representative
Rep. Mary Franson,
regarding these loopholes, she replied with feigned (I hope it was feigned) ignorance and replied with a request that I spell out for her what loopholes I was talking about.
I replied with a link to this article.
Out here, in Alexandria, we have a wide variety of local manufacturing firms which are, in effect, paying higher corporate income taxes because our state’s largest, most profitable firms,…
those with the most outrageously highly-compensated executives,…
are taking advantage of these tax dodges.
If Rep. Franson (and Senator Ingebrigston, for that matter) vote against closing these loopholes,…
and thereby vote in favor of protect those larger corporations at the expense of our local manufacturing firms, I will be only too happy to make sure that fact is widely known, here at home,…
and that the constituents of both Rep. Franson and Sen. Ingebrigston are made abundantly aware that their elected state representatives are far more interested in preserving and protecting our state’s wealthiest CEO types,…
and the wealthy moguls of the State Chamber of Commerce,…
than they are in protecting the members of our local Chamber of Commerce, the smaller companies located in their own home districts, the people who own and manage those businesses, and the people who work in them.
offshore havens
I did a programming project at Wells Fargo a few years ago. They were converting paper forms to online forms. One of the forms was a report on offshore assests. They had $62 Billion deposited in a post office box number in Grand Cayman. I commented on this and was told that “it was perfectly legal.” Hiding this money and avoiding the millions in taxes that would have otherwise gone into maintaining the state and city where they have their actual headquarters, leaves the rest of us to pay their share for them. Tax havens are not illegal but should be.
When looking at the corporations in the
PIRG report it looks like some of them would have very little reason to have a nexus to a tax haven. I agree these loop holes should be closed.
Ms. Vandervorken needs to look more closely at the factors of production and understand how those factors are supported by public investment and then she may be able to make a clearer correlation between income and benefits received from publicly provided services.
Fair share has nothing to do with income taxes, which are based on the ability to pay not equity.
Of course, by “loophole” he actually means legal tax law passed by duly elected legislators and signed by a duly elected governor. Calling it a “loophole” outside of commentaries is not journalism, it’s adopting a talking point.
Taxes
Ms. Vanvorken, “too high” taxes is a relative term. What you regard as too high may be too low for someone else. As with anything else in society, you get what you pay for. For example, if taxes are too low then we may have bridges collapsing because maintenance and replacement have been deferred too long.
On another point, corporations will not pay their fair share of taxes simply because we drop the tax rate. Instead they’ll just pocket the additional savings from the lower rate while at the same time still shift funds into offshore accounts. They’re a business after all and they will take advantage of every single tax break they can find.