Lawmakers on Capitol Hill have been complaining for years about corporate tax havens. The Congressional Research Services reports that offshore tax shelters cost the federal government between $30 billion and $90 billion a year. But such is the gridlock in Washington that even bipartisan efforts to do something about the problem have stalled. That's where Maine comes in. Tired of waiting on Washington, it passed legislation this month with an eye toward recouping the estimated $5 million in corporate income tax revenue lost a year.
The new legislation will treat income that companies list in 38 known tax haven countries as domestic income for Maine tax purposes, bringing the state millions in tax revenues. "If a big company like Apple sells things in Maine, they should pay a portion of their corporate tax in Maine, even if they have income in Bermuda," is the rationale from Democratic Rep. Adam Goode of Bangor, the sponsor of the bill.
Maine is not actually the first state to try this tactic. Montana tried it a decade ago, and last summer Oregon passed such a law. The strategy is seen as the best way to close the so-called "waters edge" loophole: Limit profit shifting by going after multinational corporations that avoid state taxes by stashing some of their earnings in offshore tax havens. In an analysis of 60 big U.S. companies, The Wall Street Journal found that on average more than 40 percent of these companies' annual profits were stashed overseas last year.
There is real tax revenue at stake. In addition to the amount the federal government loses each year, the U.S. Public Interest Research Group figures states lose $20.7 billion annually. But in the two states that have taken corrective action, Montana collected $7.2 million in extra revenue in 2010 and Oregon's Department of Revenue estimates the statute will bring in $18 million in fiscal 2014-2015.
The Citizens for Tax Justice (CTJ) and the Institute on Taxation and Economic Policy (ITEP) recently issued a joint report on the federal and state corporate tax situation, and found that although the federal marginal tax rate on corporate profits is 35 percent, few corporations pay it. As for the states, the report found that the situation is similar: The average weighted state corporate income tax rate is 6.25 percent, but of the 269 profitable Fortune 500 companies the report studied, the companies only paid an average rate of 3.06 percent. As is the case with the federal corporate tax, some of these national and multinational corporations don't fork over any tax revenue at all.The report also found that 25 companies paid no state income tax in 2012. Another 127 of the companies paid less than half the average legal state tax rate that year.
There's more data from the report that suggests corporate income taxes are no longer carrying their weight: As recently as 1986, state corporate income taxes equaled 0.5 percent of nationwide gross state product (GPS). But in fiscal year 2011, state and local corporate income taxes were 0.33 percent of nationwide GSP. Even as corporate profits have rebounded and boomed in recent years, state and local corporate taxes have not kept pace. Corporate taxes as a share of nationwide corporate profits remain near the lowest point in the past quarter century.
CTJ researchers report that the long-term decline in the state corporate income tax has three broad causes: the trickle-down impact of federal corporate tax cuts (in states that have not decoupled from the feds); unintended tax shelters created by companies' accountants and lawyers; and tax incentives enacted by state lawmakers. Governors from both parties have increased the use of incentives since the 18-month recession ended in June 2009, says Kenneth Thomas, a political science professor at University of Missouri-St. Louis.
In fact, despite the actions of Maine, Oregon and Montana, the current trend in state legislatures is to cut corporate income tax rates and award tax credits. Lawmakers in Louisiana, Nebraska and North Carolina, for example, have seriously considered outright repeal of the state corporate income tax; several other states, such as Idaho, Indiana, New York and North Dakota, have moved to cut their corporate tax rates. Indiana lowered its corporate tax rate from 8.5 percent to 6.5 percent three years ago, with the ratcheted down rate of 6.5 percent scheduled to go into effect next year. But even before that can happen, the legislature this spring lowered the rate again, this time to 4.9 percent. The same legislation also grants localities the option to eliminate their property taxes on new business equipment.
With so many states lowering their corporate tax rates and offering corporations tax incentives for doing business in the state, it raises a basic question: If everyone's giving corporations breaks, where's the incentive?
The Pew Charitable Trusts is addressing a piece of that issue by looking at ways to increase data collection and reporting overall. There is a general lack of data to evaluate the effectiveness of state incentives. The results of the initiative will, says Jeff Chapman, manager of the project, "pave the way for the development of a set of best practices that can be put to use by states around the country."