States Could Haul In A Billion Dollars By Closing One Tax Loophole

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States are leaving about a billion dollars in corporate taxes on the table each year, and all they have to do to scoop that revenue up is to follow Montana’s lead.

In 2003, Montana closed a tax loophole that companies used to evade state tax liability on profits stashed in offshore bank accounts. By erasing the so-called “water’s edge” loophole, the state brought in $40 million over the ensuing decade — a substantial figure for a small state that spends about $1.8 billion in a typical year. Oregon followed Montana’s lead last summer and expects to bring in $17 million in tax revenue from offshore corporate holdings this year alone.

If 21 other states and the District of Columbia had also closed their “water’s edge” loopholes, they would have brought in $1.015 billion in additional tax revenue in 2012, according to a report from the U.S. Public Interest Research Group (U.S. PIRG). The bulk of that total would go to large states like California ($246 million), New York ($141 million), and Texas ($141 million), but smaller states like Vermont ($4.8 million), Hawaii ($5.5 million), and Idaho ($9.4 million) would also see substantial fiscal relief. If the 27 states not covered in the report made similar moves to crack down on corporate profit offshoring, the total gains nationwide could be even larger.

The costs of state corporate tax loopholes seems likely to get special scrutiny given ongoing budget shortfalls in dozens of states five years after the financial crisis. Despite a recent rebound in tax revenues, years of fiscal crises at the state level have helped force massive public employee layoffs. That has reduced the total number of local public school educators working in the U.S. by about a quarter million. Corporate tax avoidance contributes to that cycle.

Federal policymakers have hinted at combating the same sort of international tax code manipulation that is robbing states of revenue. Tax avoidance schemes by major tech companies like Apple, Google, and Microsoft drew scrutiny from Congress last year, and Apple CEO Tim Cook was brought in front of a Senate panel to explain his company’s entirely legal scheme to park profits in low-tax international jurisdictions like Ireland and avoid billions of dollars in U.S. tax liability. Many of the largest companies in the country pay a zero percent tax rate, and the typical effective tax rate for a large, profitable U.S. company is actually lower than that paid by middle-class families.