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Report: Offshore Accounts Cost States Nearly $40 Billion

A new report estimates that offshore accounts maintained by corporations and wealthy individuals caused states to miss out on nearly $40 billion in tax revenue in 2011.

A new report estimates that off-shore accounts maintained by corporations and wealthy individuals caused states to miss out on nearly $40 billion in tax revenue in 2011.

The study, published this week by the U.S. PIRG Education Fund, brings a debate that's largely occurred at the federal level to a state context. Because states typically link their own tax policies to federal law, corporate strategies designed to dodge federal taxes can reduce state revenue as well, according to the report.

U.S. PIRG's study urges states to consider taking steps to address the situation, given the gridlock impacting the current Congress and the lack of momentum on the issue at the federal level.

Phineas Baxandall, an author of the report, concedes that it might be a challenge for any state to quickly pursue a major overhaul designed to rectify the situation. That's especially true because many states have intentionally linked to federal statutes for the sake of simplicity. "I don't know of any state that's set its sights on the revenue loss from offshore tax dodging," Baxandall says.

But he argues a good start would be for states to establish commissions to analyze where, exactly, it would be most practical to decouple from federal tax law in order to recoup some of that revenue.

The report says states could also pass laws calling for more financial disclosure from corporations; pass laws that treat parents and subsidiary corporations as one entity for tax purposes; or design strategies that look at a company's global profits, and then tax based on activity in a given location, to eliminate the benefit of shifting profits around.

Baxandall admits the idea may have its critics -- lately, it seems any proposal to generate revenue is branded as a jobs killer -- but he views the idea as a way to help small businesses, who often don't have the resources to pursue the tax shelter schemes that their larger competitors may pursue. "Markets work best when companies thrive because they're productive or efficient," Baxandall says. "Markets don't work best when the winners are the companies with the most devious tax lawyers. If you're a small business, you don't have access to some Cayman Islands subsidiary."

Does the idea have legs? Verenda Smith, deputy director of the Federation of Tax Administrators, is skeptical. She says even if tax policies were developed to make more corporate income taxable, it doesn’t necessarily mean states would enjoy similar increases in revenue, since they could only tax companies that have established what’s known as a “nexus” within a given jurisdiction.

“Just because something is taxable by the federal government doesn’t mean it would or wouldn’t flow through to the state… even assuming that company has a nexus within a state,” Smith says.

“It’s not an easy leap from, what they’re claiming at the federal level, to say it applies equally at the state level."

Communications manager for the Texas Medical Center Health Policy Institute and former Governing staff writer
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