Minnesota is on the verge of setting a tremendously helpful precedent for America’s domestic companies and their workers. That’s because the Minnesota Legislature is moving quickly to pass a tax bill that could finally end the practice of multinational corporations shifting profits to tax havens.
Corporate tax avoidance has been a frustrating issue for years. Americans have grown tired of seeing some of the world’s most profitable companies simply skate by — and not pay their fair share of taxes.
In 2018, for example, Amazon paid zero state or federal taxes despite earning more than $11 billion in profits. D ozens of other Fortune 500 firms also consistently pay little or no U.S. corporate taxes. That’s because they utilize a clever loophole known as “water’s edge” to bypass many of the state and federal taxes that domestic U.S. companies pay every day.
Essentially, what Minnesota legislators are setting up is a more equitable corporate tax system. They’re looking to implement something known as “worldwide combined reporting.” Doing so would mean that, when multinational corporations pay state income taxes in Minnesota, they must include foreign subsidiary profits in their tax calculations. It’s estimated that this could result in an additional $452 million in state revenues over the next two years.
At present, all 50 states allow corporations to use a “water’s edge” rule in order to exclude foreign-affiliate income in their tax returns. That’s very helpful for multinationals, since they can write off profits through cleverly arranged shell companies in tax havens. Of course, these various offshore “subsidiaries” have been established specifically to bypass U.S. tax liability.
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It seems obvious that a company should be measured — and taxed — on its profits. However, multinational companies have long known that, if they can exempt foreign profits from their calculations, they can manipulate their U.S. tax liability. And so, they simply use the water's-edge principle to move profits from a high-tax jurisdiction to a low-tax one.
Domestic American companies are unable to do this. They lack the resources to game the system — and they have no operations in the Cayman Islands or any other low-tax territories. That leaves them paying the full 21% U.S. corporate tax rate.
In contrast, a study by the Coalition for a Prosperous America found that, in 2019 alone, America’s 500 largest public companies paid a mere 8.7 % average federal tax rate. However, if these companies had been taxed in the same manner as America’s domestic businesses, the U.S. Treasury would have received an additional $97.8 billion .
More than 80 % of U.S. employment is supported by small businesses. It’s a huge affront to these domestic job creators that they must pay a far higher share of taxes than multinational firms with no loyalty to Minnesota or the nation. Instead, the current tax code gives multinationals a perverse incentive to keep moving companies and jobs offshore.
Now, the Minnesota Legislature is on the verge of a game-changing shift. Lawmakers are seriously thinking of eliminating the tax-avoidance loophole for multinational companies. Doing so would mean allocating tax credits and revenue in a manner that would finally reward domestic production — not overseas profiteering.
This is a welcome development. Foreign multinationals should not be allowed to avoid taxes to the detriment of domestic companies. Minnesota’s move to bring worldwide combined reporting to the state level would finally eliminate some of the major incentives for multinational tax avoidance.
Minnesota legislators should be encouraged in this effort. And once Minnesota passes this remarkable legislation, other states may soon take the same step — and start reclaiming the revenues and jobs needed to grow their economies.
David Morse of Moscow, Idaho, is the tax policy director for the Coalition for a Prosperous America Education Fund (prosperousamerica.org), which is in Washington, D.C. He can be followed on Twitter: @CentristinIdaho.
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The Trust Project
