A leak in tax shelters?
The corporate income tax has long been a relatively small, though important, portion of state tax revenue. It accounted for 5.4 percent of total tax collections in 2014, down from 7.4 percent in 2007. Revenues are down for several reasons, but the most common revenue drain comes from corporations sheltering profits (done easily these days electronically) in places with favorable taxes--aka tax havens. Along with low, or no, taxes, havens offer privacy, with laws that prevent sharing information about taxpayers. They also usually allow foreign-owned entities to "establish" themselves there without doing much business locally. Havens also often limit local residents from taking advantage of the benefits they offer foreign-owned enterprises.
Because defining a tax haven is subjective--and no one embraces that label--lawmakers are moving cautiously. To recoup some of the revenue they are losing, several states now require corporations to include in their bottom line not only income from domestic enterprises but also from affiliates incorporated or engaged in foreign tax havens. And, in the last several years, legislators in six states and the District of Columbia have passed additional tax haven laws.
Legislators in Montana and Oregon took the straightforward "blacklist" approach, which identifies and names specific tax havens and penalizes businesses that incorporate in them, Opponents argue this strategy hurts businesses with legitimate activity in these haven-labeled locations. Montana collected an additional $7.2 million after its law passed in 2010, and Oregon is anticipating $18 million more this year.
Lawmakers in Alaska, Connecticut, Rhode Island, West Virginia and the District of Columbia have taken a little different approach. They do not name havens but consider several criteria when determining a corporation's tax liability. They also allow the businesses to demonstrate they have legitimate reasons to be incorporated in a place considered a tax haven. Critics say this approach is too vague to be effective. Another 11 states considered, but did not pass, tax haven legislation in 2015, and at least 10 have done so this year.
States also have an eye on Congress. The Foreign Account Tax Compliance Act, which took effect in July 2014, improved access to information on U.S. taxpayers abroad and has led to pacts with more than 100 countries. It's expected to add $8.7 billion to federal coffers over the next 10 years.
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|Date:||May 1, 2016|
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