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As summer arrives and hard-working Bay Staters stretch back on sandy shores, many of the corporations that do business here are also taking advantage of places like Bermuda and the Cayman Islands — to dodge their share of taxes. But last week a public hearing at the Statehouse discussed closing a key loophole that currently allows multinational companies to use offshore tax havens to avoid paying Massachusetts taxes.
Many of America’s largest corporations use accounting tricks to shift profits made in America to offshore tax havens where they pay little to no taxes. Companies are allowed to indefinitely “defer” paying the state and federal portion of taxes on profits they claim to have earned abroad. Many companies game this system using loopholes that let them disguise profits legitimately made in the U.S. as “foreign” profits earned by subsidiaries in offshore tax havens. The Fortune 500 is filled with companies that earned billions in profit and paid little or no tax. General Electric, Boeing, Apple and Duke Energy are just a few of the U.S. corporations that paid little or no federal income taxes during the five-year period from 2008 through 2012, despite pocketing a combined profit in excess of $150 billion. Offshore tax havens are a primary culprit.
Nationally, multinationals avoid an estimated $90 billion in federal taxes each year by using offshore tax havens and fancy accounting tricks to avoid paying federal taxes on business activity that takes place in the U.S. And because state taxes are so closely tethered to the federal tax code, states also lose billions in tax revenue from loopholes annually.
While much of the reform necessary to stop this offshore tax dodge must happen at the federal level, states aren’t just sitting on their hands waiting for Congress to come to their rescue. A few have updated their tax code to prevent these shell games while making the tax code fairer to everyone. After all, if big multinational businesses aren’t paying their Massachusetts taxes, the rest of us end up picking up the tab, either in the form of cuts to public programs or higher tax rates.
A bipartisan group of 57 Beacon Hill lawmakers has co-sponsored an act closing a corporate tax haven loophole, HB 2477 and SB 1524, a bill filed by Rep. Josh Cutler, Duxbury, and Sen. Mark Montigny, New Bedford. Already a law in Oregon and Montana, the bill would require that companies treat profits made in Massachusetts and funneled to known tax havens like the Cayman Islands as domestic taxable income. The Massachusetts Department of Revenue has estimated that making this change to the tax code would save Massachusetts taxpayers between $64 million and $94 million a year.
This option is readily available in Massachusetts because in 2008 we enacted the “combined reporting” taxation process for businesses. This widely used approach prevents companies from pretending their profits were earned in other states. Companies use a simple formula to apportion the share of their domestic income based on a company’s property, sales and payroll located in Massachusetts. The new reform would simply extend that reporting to notorious tax havens that would otherwise make corporate income disappear.
“Small businesses already face plenty of challenges. We should not ask them to compete in a rigged marketplace favoring a few corporate giants that can afford to exploit our tax code,” testified Rep. Cutler at the hearing. “It’s time to close this loophole and let our Bay State businesses compete on a level playing field. Let’s promote innovation and creativity in the marketplace, not in our tax code.”
As I anticipate staring off at the ocean this summer, I hope not to be thinking about our tax dollars drifting off to distant islands. The committee should deliberate quickly and move the bill for a vote.
Deirdre Cummings is Tax and Budget policy director for MASSPIRG, a statewide, not-for-profit and non-partisan public interest organization.
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