Mass. State Legislature Holds Hearing on Bill to Close Tax Loophole
On Tuesday, June 9 a public hearing was held before the Joint Committee on Revenue regarding a measure that would close the “water’s edge” loophole. This tax loophole allows companies to avoid taxes they would otherwise owe by shifting profits to offshore tax havens around the globe.
Nathan Proctor, State Director of Massachusetts Fair Share, testified before the Committee:
“Over the last year, Massachusetts Fair Share has collected more than 7,000 comments and signatures from Massachusetts residents in support of closing a loophole which allows companies to avoid taxes by stashing cash in offshore tax havens like the Cayman Islands. And in just the last 5 days I have collected an additional 1,119 new signatures from Massachusetts Residents for this hearing, which I am delivering today to support H.2477 (Rep. Cutler) and S.1524 (Sen. Montigny).”
House bill sponsor Rep. Josh Cutler (Duxbury) also testified about how he, as a small business owner, sees this as an issue about basic fairness:
“As a small business owner, I know that local businesses aren’t setting up foreign subsidiaries to skirt tax codes, they’re paying their fair share for the services we all benefit from. We think it’s time to level the playing field and help our Bay State businesses.”
Back in 2008, Massachusetts enacted combined reporting that forces multi-state companies to report on their affiliates across the country. This helped stop companies from hiding profits earned in Massachusetts in other states which don’t collect corporate income tax. But companies could still hide those profits beyond the “water’s edge” in offshore tax havens. The two bills, H.2477 and S.1524 would effectively close this loophole by requiring companies to report their offshore profits in known tax haven countries.
State Director Nathan Proctor testifies before Joint Committee on Revenue in favor of closing the “waters edge” loophole. Photo by Daniel Gutowski.
Our testimony focused on public frustration with the “water’s edge” loophole that disadvantages small business and taxpayers. It has been estimated that foregone tax revenue due to the water’s edge loophole amounts to $79 million dollars that could be used to fund public projects or decrease taxes for small businesses and property owners. We noted the many signatures that have poured in that support the two bills. His testimony concluded with a resolute call for common sense:
“As Massachusetts lawmakers, especially during the budget season, you have a lot of tough choices. This one is easy. Everyone should play by the same set of rules.”
Dierdre Cummings, Legislative Director of MASSPIRG, and Phineas Baxandall, the Senior Policy Analyst of U.S. Public Interest Research Group, also testified. Cummings argued that Oregon and Montana have passed similar resolutions that have demonstrated success without any of the “chicken little, the sky is falling” impacts some industry lobbyists are claiming will take place if this measure is passed.
Dr. Baxandall focused on some of the counterarguments to the bill. First, corporate lobby groups frequently argue that the bill would force companies to be double taxed, an argument that Baxandall said was “doubly wrong.” Currently, corporations have the option to deduct foreign taxes as well as the option to file under the worldwide corporate tax option. Another common counterargument is that closing the loophole would cause an unnecessary burden that would complicate corporate taxes, but the law would actually simplify tax accounting because companies would be required to report their profits honestly rather than spending time figuring out how to rig the system. Since the only companies that would need to change they way to report their tax returns are those large enough to operate subsidiaries across the globe, it seems hard to believe that companies with teams of lawyers and accountants that created these complex tax avoidance structures would be overburdened if we made this small change.
Eileen McAnneny, president of Massachusetts Taxpayer’s Foundation represented opposing views. McAnneny said that Oregon and Montana were poor comparisons because Massachusetts has more multinational corporations that would relocate, but the evidence shows that companies would not leave as she had feared.
Dan Bucks, Montana Director of Revenue stated in a letter to Massachusetts State Representative Jay Kaufman and Massachusetts State Senator Michael J. Rodrigues:
“Administratively, there have been no noticeable costs or challenges associated with the implementation or enforcement of the law. As Director of Revenue for eight years, I received no complaints from corporate taxpayers about the law, its implementation or its impact.”
Bucks noted that the fiscal impact of the law had been positive with additional tax revenue, increased employment, and no complaints from corporations. McAnneny also claimed that the law would force companies to pay for costly accounting to report their earnings, but these companies already have teams of accountants and lawyers that would most likely have an easier job under the new law. McAnneny’s claims largely fit in line with the counterarguments that Baxandall previously debunked, and were largely excuses for upholding a loophole that supports big business, hurts Massachusetts taxpayers and puts local businesses at a disadvantage as they aren’t hiding their money in the Cayman Islands.
From the economic analysis as well as the success of Oregon and Montana, it is clear that the law would benefit the Massachusetts public by increasing tax revenue, making the tax code more fair without negatively hurting the economy. The claims made by corporate lobbyists show a disregard for fairness as well as public interest.
If the legislation presented an unnecessary accounting or financial burden, companies in Montana and Oregon would complain or relocate. As we at Fair Share like to say, it’s a common-sense law that makes sure that everyone pays their fair share.