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Sacramento -- Every year, corporations use complicated schemes to shift U.S. earnings to subsidiaries in offshore tax havens which helps them dodge both state and federal taxes. Reforms to end tax dodging in California would reduce revenue loss by nearly $2.8 billion, according to a new report called “A Simple Fix for a $17 Billion Loophole,” released today by CALPIRG Education Fund.
“When multinational businesses dodge billions in California taxes, that money doesn’t come out of a hat. It either means we have less money for education, transportation, and health care, or other taxpayers end up footing the bill,” said Emily Rusch, executive director for CALPIRG Education Fund. “As Governor Newsom lays out his priorities for California’s budget, closing offshore tax loopholes can even the playing field and pay for critical services without raising rates.”
For years, some corporations that do business here in California have dodged taxes by booking profits made in America to tax havens like the Cayman Islands, that levy little to no tax. The report, which was co-authored by CALPIRG Education Fund, the Institute on Taxation and Economic Policy (ITEP), SalesFactor.org and the American Sustainable Business Council (ASBC), looks at approaches California can take to address this offshore tax dodging.
States have the power to use a global picture of a company’s activities in order to determine how many tax dollars a state rightfully should receive. A Simple Fix details how much money each state would recover if it required companies to follow one or more standard procedures, including domestic combined reporting, tax haven list reform and worldwide combined reporting -- otherwise known as complete reporting.
Combined reporting (used already by 27 states and Washington, DC, including California) applies a formula to the total domestic business of a company to determine how much income a company should attribute to the state, instead of letting the company decide unilaterally how to allocate its profits (which incentivizes shifting money to low-tax jurisdictions).
Complete reporting expands the combined reporting to include the company’s entire global business in order to close loopholes that allow corporations to hide profits offshore.
"Whenever ambitious policy proposals emerge in California, people raise concerns about the state’s ability to pay for them," said Chris Hoene, executive director for the California Budget & Policy Center. "As this report demonstrates, our policymakers have ample options to improve the fairness and efficiency of our tax code in ways that would also provide revenue for vital state programs and supports."
“Congress promised to address offshore tax dodging in the 2017 tax package, but it failed entirely,” added Richard Phillips, a report co-author and senior policy analyst with ITEP. “If states were waiting on Washington to fix these problems before, they can’t now. And our report shows that they don’t have to.”
“Our tax system is unfair and inefficient -- and federal reform failed to address those concerns,” added Bill Parks Founder of SalesFactor.org. “Complete reporting makes tax return filing easier for small businesses, and ends the grossly unfair advantage larger multinationals currently have on their small business competitors.“
“Right now, 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 of the American Sustainable Business Council, which has a member network representing 250,000 businesses. “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 other businesses, have to pay more.”
Closing loopholes that allow offshore tax dodging would lead to significant revenue gains for most states, totaling $17 billion across the country, as illustrated in the table below. By modernizing state tax codes with these simple reforms, California would bring in $2.8 billion each year, level the playing field for local businesses that compete with multinational corporations, and protect honest taxpayers from picking up the tab for tax dodgers.
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