Column: Now's the time to close business tax loopholes
WASHINGTON -- Budget battles in the statehouse and in Washington have been predictably ugly this year. And it stands to get worse as we prepare for looming cuts across the board. In St. Paul, lawmakers continue to exchange jabs about what programs to prioritize.
The automatic across-the-board federal spending cuts that are part of sequestration make no distinction between public priorities and wasteful spending. The cuts to military spending and Medicare are getting most of the attention, but the impact doesn't stop there. Food safety programs would be forced to cancel 2,100 safety inspections, the FBI and other law enforcement agencies would lose the equivalent of 1,000 federal agents, and 1.2 million disadvantaged students would lose education grants. Minnesota stands to lose $7 million in funding for primary and secondary education, $201,000 in grants that support law enforcement, and half a million less to respond to public health threats.
Fortunately there are other solutions, one of which is hiding in plain sight. Should we really cut food safety, law enforcement and education while the nation's largest, most profitable corporations use loopholes to avoid paying the taxes they should?
Many American corporations and wealthy individuals use complicated accounting tricks to take advantage of loopholes in the tax code by moving their U.S. income to shell companies in tax havens like the Cayman Islands. They pay little or no taxes on those profits, leaving the rest of us to pick up the tab. Each year, the federal treasury loses an estimated $150 billion in revenue to offshore tax havens.
This tax dodging hurts the state budget as well. According to a recent U.S. PIRG report, Minnesota taxpayers lost more than $1.95 billion to offshore tax havens last year. That's enough money to pay state university tuition for 255,000 students, or cover the annual state budget for the public safety and transportation departments for two full years.
Closing these offshore tax loopholes should be an obvious first step to lessen our budget woes at both the state and federal level. At the federal level, closing tax loopholes would generate more than enough revenue to offset the impending budget cuts.
Unfortunately, the use of tax havens has become standard practice in corporate America. At least 83 of the 100 largest publicly traded American corporations have subsidiaries in tax haven countries. That includes Bank of America, Goldman Sachs, Wells Fargo, and JP Morgan Chase -- banks rescued by bailouts in 2008, courtesy of American taxpayers --which use a total of 551 offshore subsidiaries to avoid taxes.
Microsoft's creative accounting is a classic example of how these schemes work. Over a span of three years, Microsoft avoided $4.5 billion in federal income taxes by selling some of its intellectual property rights to a subsidiary in tax-friendly Puerto Rico. This allows Microsoft to pay that subsidiary 47 percent of the revenue from its American sales, moving these profits offshore -- even though the profits came from products that were developed and sold in the U.S. It's all technically legal, but it's definitely not right.
It's time for this free ride to end. These companies benefit from our nation's educated workforce, infrastructure, and security, yet they do everything they can to avoid paying what they should. When corporations don't pay, they dump their tax burden on the rest of us and force us to make up the difference through cuts to public services, a bigger deficit, or higher taxes. With serious budget challenges before us, closing offshore tax loopholes should be at the top of every lawmaker's list.
Dan Smith is Tax & Budget Advocate for U.S. PIRG (Public Interest Research Group.