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corporate taxes
Minnesota Democrats Show It's Possible to Curb Tax Avoidance by Corporations
The state-level approach sends a clear signal that the days may be coming to an end when big multinationals can scare state lawmakers into allowing them to game the tax system.
Jul 09, 2023
Earlier this year, Minnesota lawmakers came within a whisker of enacting a sorely needed corporate tax reform that would have insulated the state from the corrosive effect of offshore corporate tax dodging. This reform, known as worldwide combined reporting, is the gold standard for corporate tax sustainability at the state level. The state’s near miss, and the second-best solution Minnesota ultimately enacted this year, known as GILTI (the Global Intangible Low Taxed Income provision), each provide a blueprint for the loophole-closing strategies that other states should prioritize.
The goal and strategy of worldwide combined reporting are simple: the goal is to prevent large multinational corporations from artificially shifting their income out of the U.S. and into foreign tax havens, and the strategy is to require big multinationals to include all their income—from the biggest nation to the smallest foreign tax haven – in one big pot before determining Minnesota’s proper share of worldwide income.
Absent this reform, big multinationals can reap huge tax cuts by shifting their U.S. profits out of Minnesota—where state tax laws can, sensibly, reach those profits—to low-rate foreign tax havens that are utterly beyond the reach of states. This income shifting remains a gigantic drain on corporate taxes, as an ITEP analysis of IRS data reveals. Because worldwide combined reporting starts by putting the income of foreign subsidiaries in the same pot as domestic profits, it takes away the incentive for companies to shift their income out of the U.S. and into tax havens.
If this strategy sounds familiar, it should: it’s the same concept as water’s edge combined reporting, a vital reform half the states have now put in place to prevent corporations from artificially shifting U.S. income into low-tax states. The “water’s edge” version prevents companies from using Delaware as a tax dodge but is helpless to prevent profits from sailing across the ocean to more exotic tax havens like the Cayman Islands or Luxembourg. Extending an existing combined report beyond the water’s edge, or enacting a combined report that immediately reaches worldwide, is a reform that would put an end to aggressive profit-shifting in one fell swoop.
When Minnesota’s House and Senate passed worldwide combined reporting earlier this year (before lawmakers lost their nerve in conference committee), it took many observers by surprise. But from a worldwide perspective, this move was anything but shocking: around the world, the walls are closing in on offshore corporate tax avoidance.
More than 140 countries have now signaled their support for a multinational effort to tax corporate income where it is earned. A new corporate tax backstop enacted by Congress and the Biden administration last year promises to help mitigate corporate efforts to hide profits in tax havens. Even the otherwise-awful Tax Cuts and Jobs Act (TCJA) included provisions—most notably GILTI—designed to discourage artificial offshoring of profits. Seen through this lens, Minnesota’s move seems both predictable and welcome.
GILTI conformity is a clear second best compared to worldwide combined reporting but is nonetheless a valuable step forward. Enacted at the federal level as part of the 2017 Tax Cuts and Jobs Act, the GILTI provision is designed to discourage offshore income shifting. Rather than identifying specific foreign tax havens, GILTI applies a U.S. tax to foreign profits that are disproportionately large relative to the offshore tangible assets that supposedly are generating these profits. In particular, GILTI applies to foreign income exceeding a 10 percent rate of return on foreign tangible assets.
While the GILTI approach is less explicitly targeted to specific foreign tax havens, it’s designed to ensure that large multinationals best known for shifting profits into foreign tax havens will no longer be rewarded for doing so. And early indications are that it’s achieving this goal.
For example, Minnesota-based 3M has paid an average of $65 million a year in GILTI tax over the five years since GILTI took effect at the federal level, a clear indication that the company is reaping suspiciously large profits in foreign countries where its physical footprint is small. So the state’s move to couple with this federal provision will help ensure that GILTI tax payments made by 3M and other large multinationals will benefit Minnesota taxpayers as well, to the tune of over $400 million during the next biennium.
Minnesota’s last-minute retreat from worldwide combined reporting, and subsequent embrace of GILTI, appears increasingly a Pyrrhic victory for the business lobbyists who used misleading scare tactics to jangle lawmakers’ nerves.
These lobbyists, acting at the behest of large multinational corporations, have protested vigorously against every sustainable corporate tax reform proposal in the last quarter century. They complained when more than half the states enacted water’s edge combined reporting as the 21st century began; they have pushed for a bigger sales factor, more generous manufacturing incentives and research tax credits; and have fought against better disclosure of how this raft of tax breaks affect their own tax rates. They do it not because their arguments have merit, but because pushing for ever-lower corporate taxes is their job. And, until recently, they have done their job well.
But the qualified success of Minnesota’s GILTI conformity—to say nothing of the state’s serious dalliance with the game-changing worldwide combined reporting–sends a clear signal that the days may be coming to an end when big multinationals can scare state lawmakers into allowing them to game the tax system. For lawmakers seeking to level the playing field for small businesses against the predations of big multinationals, following in Minnesota’s footsteps should be on the short list of reform goals.
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34% of Big, Profitable US Corporations Paid $0 in Federal Taxes in 1st Year of Trump Tax Law
"Instead of cutting vital and popular programs like Social Security and Medicare, we need to repeal the Trump tax breaks for the rich and demand that the largest corporations in America finally start paying their fair share of taxes," said Sen. Bernie Sanders.
Jan 13, 2023
A study released Friday by the Government Accountability Office found that more than a third of large, profitable corporations in the United States paid nothing in federal income taxes in 2018, the year the regressive Trump-GOP tax cuts took effect.
The GAO analysis, commissioned by Sen. Bernie Sanders (I-Vt.), showed that "average effective tax rates—the percentage of income paid after tax breaks—among profitable large corporations fell from 16% in 2014 to 9% in 2018."
According to the GAO, the share of profitable large corporations that owed $0 in federal income taxes after credits rose from around 22% in 2014 to 34% in 2018.
"Each year from 2014-2018, about half of large corporations and a quarter of profitable ones didn't owe federal taxes," the GAO noted. "For example, profitable corporations may not owe taxes due to prior years' losses."
The Tax Cuts and Jobs Act, which former President Donald Trump signed into law in December 2017, slashed the corporate tax rate from 35% to 21% and authorized a slew of other giveaways that made it easier for large businesses and wealthy individuals to lower their tax bills.
"While House Republicans want to make huge cuts to Social Security, Medicare, and Medicaid because of their 'serious concern' about the deficit, they voted to provide over a trillion dollars in tax breaks to large corporations and the top one percent," Sanders said in a statement Friday. "The situation has become so absurd that over a third of the largest and most profitable corporations in our country pay nothing in federal income taxes."
"Instead of cutting vital and popular programs like Social Security and Medicare," the senator added, "we need to repeal the Trump tax breaks for the rich and demand that the largest corporations in America finally start paying their fair share of taxes."
"The situation has become so absurd that over a third of the largest and most profitable corporations in our country pay nothing in federal income taxes."
The GAO report doesn't name the specific companies that paid nothing in federal income taxes over the period the federal agency examined.
But separate analyses from outside organizations such as the Institute on Taxation and Economic Policy (ITEP) have identified such corporations. In 2021, ITEP found that at least 55 large U.S. corporations including Nike, FedEx, HP, and Kinder Morgan paid $0 in federal taxes on 2020 profits.
Steve Wamhoff, ITEP's federal policy director, wrote in a blog post on Friday that the GAO's new study confirms that "the Tax Cuts and Jobs Act was an unprecedented gift to corporations."'
"What the GAO report really demonstrates is that no matter how you measure the federal corporate income tax, not much of it has been paid in recent years, and the 2017 tax law has brought it to a new low," Wamhoff added. "The corporate minimum tax enacted as part of the Inflation Reduction Act will help address this problem. But as ITEP has explained, another key step for Congress is to implement the international corporate minimum tax that the Biden administration negotiated with other governments, and which is designed to address the offshore tax dodging that will otherwise be very difficult to resolve."
Sanders, for his part, pointed to 2021 legislation he introduced alongside Rep. Jan Schakowsky (D-Ill.) that "would have restored the pre-Trump corporate tax rate of 35% and comprehensively shut down offshore corporate tax avoidance."
"The provisions in this bill to close offshore loopholes alone could raise over $1 trillion in revenue from multinational companies over the next decade," Sanders' office noted in a press release Friday.
The legislation, formally titled the Corporate Tax Dodging Prevention Act, never received a vote in the Senate or the House.
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New GAO Report Confirms Trump Tax Cuts Were Massive Corporate Giveaway
The share of these companies who paid zero in federal income tax rose from 22 percent in 2014 to 34 percent in 2018, the first year that the Trump tax law was in effect.
Jan 13, 2023
The tax cuts signed into law by former President Trump at the end of 2017 were a boon for profitable corporations, according to a new report released by the Government Accountability Office. It finds the average effective federal income tax rate paid by large, profitable corporations fell to 9 percent in the first year that the Trump tax law was in effect, and the share of such companies paying nothing at all rose to 34 percent that year.
This is consistent with our findings that profitable corporations often pay little or nothing. While the corporate minimum tax passed this summer will help, Congress now needs to pass the international corporate minimum tax to further address this problem.
The GAO analysis presents many different types of figures, but all show the Tax Cuts and Jobs Act was an unprecedented gift to corporations. For example, it finds that the share of all corporations paying no federal income taxes was 67 percent in 2018 and had not changed much over the years. But that is not so surprising because that figure includes tiny companies and companies reporting losses, which are not expected to pay income taxes. (The federal corporate income tax is, after all, a tax on profits, not losses).
Much more alarming are the GAO’s conclusions about corporations that are both large (which GAO defines as having at least $10 million in assets) and profitable. The share of these companies paying nothing rose from 22 percent in 2014 to 34 percent in 2018, the first year that the Trump tax law was in effect.
What the GAO report really demonstrates is that no matter how you measure the federal corporate income tax, not much of it has been paid in recent years, and the 2017 tax law has brought it to a new low.
The average effective federal income tax rate paid by these companies (the share of profits they paid in federal income taxes) fell from an already-low 16 percent in 2014 to a nearly rock-bottom-low 9 percent in 2018.
These estimates use corporations’ actual tax liability based on IRS data that is not available to researchers outside the government. Still, the GAO report shows that the “current” tax reported by publicly traded corporations in the filings they submit to the Securities and Exchange Commission (which is what ITEP uses to identify how much specific corporations pay) comes to roughly the same answers.
For example, while GAO found that average effective tax rates based on actual tax liability (using IRS data) fell from 16 percent in 2014 to 9 percent in 2018, an alternative version of those figures calculated using current taxes reported in the public filings are just a bit different, at 17 percent in 2014 and 8 percent in 2018.
Even profitable corporations might pay nothing in one year because they are allowed to carry forward losses from previous years. If the system works as intended, corporations that are profitable in the long run will pay taxes at a reasonable effective rate over time. But the GAO analysis demonstrates that even if the data is adjusted to ignore the deductions that companies can claim for losses, the conclusions do not change very much (in which case the average effective income tax rates increase slightly to 18 percent in 2014 and 10 percent in 2018). This is unsurprising because ITEP has followed corporations that were profitable each year for several years in a row and found that even these fortunate companies often manage to pay nothing over time.
What the GAO report really demonstrates is that no matter how you measure the federal corporate income tax, not much of it has been paid in recent years, and the 2017 tax law has brought it to a new low.
The corporate minimum tax enacted as part of the Inflation Reduction Act will help address this problem. But as ITEP has explained, another key step for Congress is to implement the international corporate minimum tax that the Biden administration negotiated with other governments, and which is designed to address the offshore tax dodging that will otherwise be very difficult to resolve.
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