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New Report Offers Simple Fix for a $17 Billion Corporate Tax Loophole

Many U.S. businesses and families struggle to pay both their own basic bills and taxes for shared infrastructure and services, while big multinational corporations dodge taxes on U.S. earnings with offshore tax-haven subsidiaries. But states don’t have to wait for Congress to help them recoup billions in lost tax revenue.

A report produced by ASBC, U.S. Public Interest Research Group (PIRG) Education Fund, Institute on Taxation and Economic Policy (ITEP), and SalesFactor.org, explains how states themselves can provide “A Simple Fix for a $17 Billion Corporate Tax Loophole.”

“Responsible businesses pay their fair share of taxes, while others are allowed to dodge and avoid their fair share. That hurts everyone,” said John O’Neill, Senior Tax Policy Analyst for ASBC. “Too many companies have abandoned their moral obligation to pay the full amount they owe for the public services and infrastructure they use in our states. That means other taxpayers, including businesses, pay more. Tax reforms like the ones in this report are critical to reestablish equity in our corporate tax system and ensure adequate funding for our future.”

The report, “A Simple Fix for a $17 Billion Loophole,” subtitled, “How States Can Reclaim Revenue Lost to Offshore Tax Havens,” outlines options. One is to expand the existing Combined Reporting system adopted by 27 states and D.C. In a Combined Reporting system, companies report their total domestic (including subsidiaries’) profits, of which the state calculates how much is attributable to business activities in that state and subject to taxation in that state. “A Simple Fix” recommends Combined Reporting on a worldwide level, or “Complete Reporting.” If a state makes up two percent of a company’s global business, then two percent of its taxable profit would be subjected to that state’s tax rate.

Another option, to extend the domestic formula to include known tax havens, is how the report derives its loophole value estimate of $17 billion. Also known as the Tax Haven List approach, this reform requires companies to include their U.S. profits held in offshore tax havens when calculating taxes. In many states, companies can elect to be “water’s edge” and calculate their tax liability based on income held in subsidiaries incorporated in the U.S. By declaring a statutory list of tax havens, states can treat a proportional share of corporate profits booked to offshore tax havens as domestic income for state tax purposes.

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. 

ASBC supports closing corporate tax-dodge loopholes to foster a more just and sustainable American economy.

Read or download the complete report.

Source Author: 
Mary Wynn-Ryan and Bob Keener
Source Publication Date: 
January 17, 2019