As she was unveiling her tax bill this week, Senate Taxes Committee Chair Ann Rest said her plan had been to block any tax increases. With a $17.6 billion revenue surplus, the New Hope DFLer didn’t even hold hearings on bills that increased general fund taxes.
Unlike the DFL House, the Senate Taxes Committee hadn’t talked about Gov. Tim Walz’s request for a capital gains surcharge or House DFL proposals for a new income tax tier for high earners and something called “worldwide combined reporting.”
“We were hoping that was not going to be necessary,” Rest said. “I was wrong.”
Directions from Senate DFL leadership, she said, were that her tax bill could include $3 billion in tax cuts and increased tax aids and credits, but she’d need to include a billion or so in increased tax collections. That’s why the change in how multinational corporations are taxed made its first appearance in the Senate just as the tax plan was released. Coming late in the session, Rest acknowledged that few of the committee members knew much about it.
What is it? It’s called worldwide combined reporting, because it requires corporations with subsidiaries to consider their revenue from outside the United States. The change could allow Minnesota to increase its take from the corporate franchise tax by $600 million in the next two-year budget, $1.2 billion over four years.
But it is also risky. Not only would Minnesota be the only state to fully tap overseas earnings of corporate subsidiaries, no other nations do so. Alaska limits its requirement to oil and gas companies.
Currently, the state calculates its corporate tax collections based on earnings within the United States. Those corporations are still assessed state taxes based on their business activities within the state. But their tax bills are based on a formula that could increase state tax payments if those same corporations must start including revenue from foreign-based subsidiaries.
The explanation of it all could make even a tax attorney’s eyes glaze over. The political bottom line is that many Democrats and liberal advocacy groups think it is a way to combat the movement of profits to overseas tax havens. It is part of the fair-share campaign that argues that corporations don’t pay enough in taxes.
“This puts our local businesses at a competitive disadvantage and it’s just wrong,” said House Taxes Committee Chair Aisha Gomez, DFL-Minneapolis. “Whether worldwide combined reporting raises one dollar or a billion dollars, it is the right thing to do and I’m very proud to include this provision in the bill.”
At the same time, many Republicans and business organizations think it is a good way to chase businesses out of Minnesota – if the tax is even collectable. Senate Republicans asked for a briefing on the bill.
“This is a massive tax increase and we’re just trying to understand how this is going to affect Minnesota companies,” said Sen. Jeremy Miller, R-Winona. During a hearing Thursday, Melissa Tape, who is an attorney for the state Department of Revenue, said Minnesota would be the first to go beyond what is termed “the water’s edge” for corporate tax purposes. The exception is Alaska, which uses worldwide combined reporting only for oil companies.
And the estimates of how much money it would bring in are based on academic studies and examinations of a recent federal tax change that captured some overseas earnings.
“There is not a reliable direct measure of the amount of income that would be subject to this,” said Department of Revenue tax research director Eric Willette. The revenue estimates are less precise than when the agency, for example, is asked to project how much a tax-rate change of an existing tax would raise, he said.
“Anytime there’s a proposal for something new when there isn’t a direct measure, there’s a higher risk that the estimate may be wrong,” he said, later adding, “we could be low, we could be high.”
Fred Nicely, senior tax counsel for the Council on State Taxation which analyzes state tax issues for large corporations, said Minnesota would not only be the only state imposing such broad rules, there are no other countries that do so. Alaska does use the broader reporting for the oil and gas industry only.
“A determination of what entities are part of the unitary group at the international level would be extremely difficult both for taxpayers and for the DOR,” Nicely said. Current law that stops income reporting at “the water’s edge” is already difficult to assess. There was a push by states in the 1980s to impose the rules, he said. But they refrained due to pushback from corporations and threats from foreign nations to do the same for U.S. companies.
States like Minnesota allow corporations to claim credits on state taxes for taxes paid to the U.S. or other states so that the same earnings are not taxed twice. No such mechanism exists for taxes paid to other nations, which could lead to double taxation on the same income.
Progressive tax organizations have been promoting this method as a way of collecting taxes from corporations that shift profits to overseas subsidiaries to avoid state taxes. A report by a group of national organizations including U.S. PIRG and the Institute on Taxation and Economic Policy called it a “A Simple Fix for a $17 Billion Loophole.”
“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,” the report states. “Instead of reducing the problems of offshore tax dodging, recent changes to federal law increase the incentive for companies to stash their profits abroad. 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.”
So far, Minnesota is the only state trying to take on the issue.
Is the worldwide combined reporting proposal real?
Both the House and Senate need the revenue from the tax change to keep their budgets in balance, both for the 2024-25 budget and for the two years after that.
But it might be a space saver that could be replaced later with a stash of cash sitting in the target for the bonding bill, the state’s construction budget. Normally, the state sells bonds to cover the costs of projects that are paid off over their life, similar to a mortgage for a house. But the state constitution requires 60% majorities of the House and Senate to sell bonds, giving minority Republicans some bargaining power.
While the House GOP offered up enough votes to reach 60% in exchange for projects in GOP districts, Senate Republicans have so far withheld their support. To call their bluff, the budget targets set by Gov. Tim Walz and legislative leaders put a lot of cash toward capital spending — $2.3 billion.
Minority lawmakers use the needed votes to get something they want. Sometimes it is projects, sometimes it is something else. Senate GOP leaders have offered a deal to trade votes for bonds for deeper tax cuts, especially a full elimination of state income taxes on Social Security income.
The DFL has so far rejected that for their preference for a plan that absolves about 75% of Social Security recipients from state taxes. Still, a deal on selling bonds instead of using cash could free up a few billion dollars for other priorities, which could include jettisoning the worldwide combined reporting plan. That would require Walz and the leaders increasing the so-called target for tax cuts from $3 billion to $4 billion.