The State Tax Research Institute (STRI) – a foundation affiliated with the Council On State Taxation (COST) – is pleased to announce the release of its study on state “tax haven” legislation. The report, “State Tax Haven Legislation: A Misguided Approach to a Global Issue,” provides an in-depth analysis of the problems, fallacies, and risks associated with adopting tax haven legislation.
Tax haven legislation has recently emerged as a significant but troubling trend among states for addressing the taxation of foreign source income. There remains, however, a large gap between states that have introduced such legislation and those that have adopted such legislation. While twelve new states considered tax haven legislation in 2015, only one (Connecticut) adopted such legislation. The overall number of states that have adopted state tax haven legislation remains small (seven) with wide variations in the statutes in these states. “The study is a significant and timely addition to the public policy debate surrounding the taxation of foreign source income”, says Douglas Lindholm, President and Executive Director of COST, and CEO of STRI, “because it debunks many of the misconceptions relating to the impact of profit shifting on state and local finances and the viability of singling out nations for punitive tax treatment.”
At its core, state tax haven legislation seeks to expand the scope of state taxation to encompass income earned by foreign subsidiaries in countries that a state defines as tax haven jurisdictions. This approach signals at least a partial return to the mandatory worldwide combination filing method abandoned by the states in the 1980s, and raises significant political, economic development, and constitutional concerns for states.
This report analyzes state tax haven legislation and makes the following key findings:
- There is no clear evidence that profit shifting to tax havens is eroding the state corporate tax base.
- Since 2000 - the alleged peak period of profit shifting - the share of state and local taxes paid by business has actually increased from 42.6 percent to 45 percent.
- Revenue loss estimates made by proponents of state tax haven legislation have been grossly inflated and are completely out of line with the states’ own revenue estimates.
- State tax haven blacklists are arbitrary and unmanageable.
- The tax haven approach is inconsistent with the legislative and regulatory solutions being considered elsewhere in the world to address profit shifting.
- The states generally do not have the expertise in, nor responsibility for, international tax rules, tax treaties, or foreign affairs that would facilitate creating and managing such lists.
- States adopting tax haven legislation risk losing investments and jobs, and face constitutional challenges.
- As with the adoption and then repeal of worldwide combined reporting statutes over thirty years ago, states that enact tax haven statutes risk retaliation from foreign governments and disinvestment by domestic and foreign multinationals.
- While worldwide combined reporting regimes ultimately withstood constitutional (but not political) scrutiny, the result may be different with state tax haven statutes that make selective determinations about the adequacy of foreign nations’ laws.
Click here to view the full report. Questions regarding the report should be directed to Karl Frieden or Ferdinand Hogroian.