The Tax Haven Tradeoff

How Offshore Tax Haven Abuse Hurts Wisconsin Taxpayers and Businesses

Wisconsin could recoup an estimated $28.8 million annually from offshore tax havens by passing a simple, proven reform already on the books in other states.  The so-called “water’s edge” loophole allows multinational companies to use foreign subsidiaries to make it appear as if income earned in the United States was instead earned in offshore tax havens like the Cayman Islands that charge no taxes and have traditionally failed to disclose information to U.S. tax authorities.  The companies who exploit this loophole dodge the taxes they owe; Wisconsin businesses and taxpayers foot the bill.  

Report

WISPIRG

Executive Summary

Wisconsin could recoup an estimated $28.8 million annually from offshore tax havens by passing a simple, proven reform already on the books in other states.  The so-called “water’s edge” loophole allows multinational companies to use foreign subsidiaries to make it appear as if income earned in the United States was instead earned in offshore tax havens like the Cayman Islands that charge no taxes and have traditionally failed to disclose information to U.S. tax authorities.  The companies who exploit this loophole dodge the taxes they owe; Wisconsin businesses and taxpayers foot the bill.  

When companies take advantage of Wisconsin’s markets, educated workforce, and infrastructure, but use offshore subsidiaries to avoid paying taxes, the bill does not simply disappear.  Instead, the bill gets divided among other companies and individuals that pay higher taxes or experience cuts to public programs and services.  For example, revenue lost from offshore tax haven abuse may directly impact the level of funding municipalities receive from the state.  When state aid gets cut, municipalities are forced to either cut the services they provide (like repairing potholes and maintaining other local infrastructure) or raise property taxes to meet those needs.  Wisconsin businesses without offshore subsidiaries also suffer because they must compete against multinational companies that have an artificial cost advantage due to their tax dodging.

Ultimately, all taxpayers and corporations in Wisconsin rely on public infrastructure and services, including education, public health, police, fire, sanitation, parks and recreation, and transportation, for a healthy economy and a successful business.  Nobody should be able to play by different rules, and exploit the tax code to reduce their share of taxes, which supports the services and infrastructure they use.  

Closing the “water’s edge” loophole would prevent corporations from using foreign subsidiaries in known tax haven jurisdictions to hide taxable income.  Recouping $28.8 million each year would mean a lot to Wisconsin taxpayers.  It could, for instance, be returned to taxpayers in the form of a $10 annual tax cut for all state household tax filers, or be used to support education, funding the equivalent of 531 additional teachers for Wisconsin schools.  This report examines the tradeoff that Wisconsin taxpayers and businesses must face when multinational companies can exploit the tax code and get out of paying the taxes they owe.