Last May, we wrote about Colorado’s failed effort to put tax haven legislation on the November 2015 ballot. Had it gotten out of the legislature and been approved by voters, it would have made it more difficult for corporations to shelter income in a foreign tax jurisdiction.
In September, we addressed Washington, D.C.’s Combined Reporting Clarification Act of 2015, which identified 39 specific jurisdictions as tax havens, and was intended to enable more effective enforcement of tax laws. This measure was expected to increase business income tax revenues by $3.7 million in fiscal year 2017, and by a total of $10.6 million in the fiscal years 2016 through 2019.
As these articles showed, tax haven legislation is on lawmakers’ minds, because it has the potential to limit corporate tax dodging, thus mitigating the loss of badly needed revenues. But a February 2016 report by the State Tax Research Institute (STRI), an affiliate of the Council On State Taxation (COST), suggests otherwise. In State Tax Haven Legislation: A Misguided Approach to a Global Issue (Report), the authors found the following:
- There is no clear evidence that profit shifting to tax havens is eroding states’ corporate tax bases;
- State tax haven blacklists are arbitrary and unmanageable; and
- States adopting tax haven legislation risk losing investments and jobs, and face constitutional challenges.
As to the first finding, the Report refers to “supersized estimates” of state tax revenue losses that some attribute to “alleged ‘profit shifting’ to ‘offshore tax havens.’” The authors cited, and criticized, the U.S. Public Interest Research Group’s (USPIRG) conclusion that $26 billion in state corporate tax revenue losses had accrued in 2011, in part because that same group asserted a different number the following year - $20.7 billion.
Similarly, the Report attacked a USPIRG estimate that Washington, D.C. could achieve $284 million in tax haven revenue, later revised to $17.9 million. Moreover, the District itself expected to increase business income tax revenues by just $3.7 million in fiscal year 2017, as noted above.
More generally, the Report compares what proponents of tax haven legislation identify as peak erosion and profit shifting, with the overall share of state and local taxes paid by businesses. It found that the latter was “remarkably stable,” suggesting that profit shifting has had only a limited impact on the tax base.
For these and other reasons, while fully conceding the fact that “profit shifting is a significant issue that must be addressed,” the Report confronts and challenges the reliability of the analysis, methodology, assumptions, and data that lead to conclusions that tax havens are eroding states’ corporate tax bases.
With respect to the blacklists, the Report declares that the recent experience of several states “confirms that state tax haven lists are inherently arbitrary and unmanageable.” This is, at least initially, because the tax haven lists were based on those that were prepared not to limit profit shifting, but to exchange information in a transparent manner. The list was subsequently discontinued because it had fulfilled its transparency goals.
Beyond this, states themselves struggle to identify which countries should be blacklisted, because there is no national or international guidance.
Finally, tax haven legislation is risky for states because it has the potential to reduce business employment and investment, and invite foreign retaliation and constitutional challenges. We mentioned this argument in our May article addressing Colorado’s bill, noting that COST had opposed the legislation in a letter to the Colorado House of Representatives. Its opposition was based on what COST considered to be the arbitrary application of discriminatory treatment to corporations doing business in Colorado.
Additionally, the Report reveals that foreign direct investment in the 50 states amounted to $236.3 billion, and questions whether discouraging so much investment is wise. Similarly troubling, the Report surmises that “state tax haven legislation will almost certainly face legal challenges under the Foreign Commerce Clause and Foreign Affairs Powers Doctrine.”
In the end, the Report points out that there are only a few states and jurisdictions that have enacted tax haven legislation:
- Rhode Island
- West Virginia
- District of Columbia
Connecticut was the only state in 2015, out of 12, that actually adopted a tax haven law. According to the Report, a continuation of this trend would reflect “a fundamental misunderstanding of both the need for and efficacy of these policies.”