When U.S. corporations and wealthy individuals use offshore tax havens to avoid paying taxes to the federal government, it is an abuse of our tax system. Tax haven abusers benefit from our markets, infrastructure, educated workforce, and security, but they pay next to nothing for these benefits. Ultimately, taxpayers must pick up the tab, either in the form of higher taxes, cuts to public spending priorities, or increased national debt.
Tax havens are countries or jurisdictions with minimal or no taxes. Corporations and individuals shift earnings to financial institutions in these countries to reduce their U.S. income tax liability—costing the federal government $150 billion in lost revenues each year.
Federal taxpayers are not the only victims of offshore tax havens. Tax havens deprive state governments of billions of dollars in badly needed revenues as well. Based how much income is federally reported in each state, and on state tax rates, it is possible to calculate how much each of the state governments lose as a result of offshore tax dodging.
In 2011, states lost approximately $39.8 billion in tax revenues from corporations and wealthy individuals who sheltered money in foreign tax havens. Multinational corporations account for more than $26 billion of the lost tax revenue, and wealthy individuals account for the rest.
• $39.8 billion would cover education costs for more than 3.7 million children for one year.
• This sum is also roughly equivalent to total state and local expenditures on firefighters ($39.7 billion) or on parks and recreation ($40.6 billion) in FY 2008.
• Table ES-1 lists the top 10 states with the most revenue lost to tax haven abuse.
Table ES-1. Total Annual Income Tax Revenues Lost to Tax Havens (Individual and Corporate Income Taxes Combined)
Rank State Revenue Losses (Millions)
1 California – $7,147
2 New York – $4,275
3 New Jersey – $2,833
4 Illinois – $2,545
5 Pennsylvania – $2,105
6 Minnesota – $1,953
7 Massachusetts – $1,688
8 North Carolina – $1,049
9 Florida – $979
10 Maryland – $966
• Some of the largest companies in the United States use tax havens, including many that have taken advantage of government bailouts or rely on government contracts. As of 2008, 83 of the 100 largest publically traded corporations in the United States maintained revenues in offshore tax havens, according to the Government Accountability Office.
• At the end of 2011, 290 of the top Fortune 500 companies using tax havens collectively held $1.6 trillion in profits outside the United States—up from $1.1 trillion in 2009—according to Citizens for Tax Justice.
Federal policymakers must crack down on tax haven abuse, but with Congress often gridlocked, states should act independently to reduce the impact of offshore tax havens on state budgets.
States can act immediately to restore fairness to the tax system and minimize the fiscal impact of offshore tax haven abuse through policy changes that will close loopholes and increase their ability to detect and penalize tax avoidance. For example:
1. States can “decouple” their tax system from the federal tax system. Because states typically use the same definitions of income as those in the federal tax code, they automatically lose money when tax haven users don’t report income to the federal government. Decoupling would help prevent those automatic losses. Rather than allow income that has been shifted out of sight from federal tax authorities to diminish the tax baseline, states can close loopholes that restore this hidden income.
2. States can require worldwide combined reporting for multinational corporations. Combined reporting is the practice of treating the parent and subsidiary companies of a multinational corporation as one corporation for the purpose of calculating taxes. Adding up all profits earned worldwide by a company, and then taxing a share of those combined profits according to the company’s level of activity in each country, would eliminate the tax benefits of shifting profits to tax havens such as Bermuda or Ireland.
3. States should urge their federal representatives to reject a “territorial” tax system, which would further erode state revenue. Such a system would allow companies to bring all of the profits they have parked offshore in tax havens back into the United States without paying U.S. taxes.
4. States can require increased disclosure of financial information about corporations’ business presence in other countries and how they price their transfers with their own foreign subsidiaries; as well as to explain why large disparities exist between the profits corporations report to shareholders and tax authorities. These measures would provide more information for state authorities to search for red flags, decide when to audit, and crack down on abuse.
5. States could withhold taxes as part of federal FATCA withholding. The Foreign Account Tax Compliance Act (FATCA) prescribes a 30 percent federal withholding tax on companies that transfer funds to foreign financial institutions that do not comply with U.S. disclosure and reporting requirements. States that collect income taxes could withhold state taxes on these funds at the same time.