Will Maine Governor LePage Stand Up To Tax Dodging Multinationals? Montana And Oregon Already Have

Special Interest Tax Loophole #6: “The Water’s Edge.”

While Congress cowers before multinationals’ lobbyists and moves to re-enact loopholes that let corporations like GE GE and Apple AAPL hide their income from the IRS, the Maine Legislature decided it had enough.

On Friday, April 4, Maine passed legislation that will end some of the games.

“I would like the Governor to sign the bill,” said Rep. Adam Goode, the sponsor of the legislation. “The bill is about huge multinational corporations that hide their income in off shore tax havens. Small businesses in Maine don’t use these tricks. That puts Maine’s small businesses at a competitive disadvantage.”

Governor LePage has ten days to sign the bill into law, veto it, or let it become law without his signature. According to Maine Revenue Services, closing the “Water’s Edge” loophole will raise $10 million for every two year budget cycle.

Related: Congress Moves The Tax Loophole Bill Forward

“In Maine $10 million is a lot of money,” said Rep. Goode. If the Governor vetoes the bill, “we’re sending a message that we’re prioritizing multinational corporations’ access to tax havens over kids access to head start or seniors’ access to prescription drugs. Those programs are routinely on the chopping block.”

The Water’s Edge Loophole

Companies can dodge taxes by shifting income to low-tax jurisdictions. Not only do they send the money to tax havens off shore, but they also set up companies to hide income in low tax states, such as Nevada and Delaware. Twenty-three states and the District of Columbia countered stateside tax avoidance by “combined reporting.”

Combined reporting requires companies to report their income in all states; then the combined income is taxed in proportion to the business’s activity in their state. That way, if large amounts of income that were produced by business activity in, say Maine, but were reported for tax purposes as belonging to Delaware, it would be included in the total income pie that Maine would proportionately tax.

But if combined reporting stops at “the Water’s Edge," it only includes income reported within the United States. To get at offshore tax havens, the states can require worldwide combined reporting, or Water’s Edge plus a list of known tax havens.

Maine, like Montana and Oregon, has taken the latter approach. Rep. Goode’s bill includes a list of 38 known tax havens.  Goode noted that Maine already uses combined reporting to stop corporations from hiding their money in low tax states like Delaware or Nevada. “If we won’t let corporations hide their money in Delaware, why would we let them hide it in the Cayman Islands or Bermuda?”

Multinationals Lobbied to Stop Taxes at the Water’s Edge

According to a U.S. PIRG report on how multinationals’ tax avoidance hurts states and how ending the Water’s Edge loophole would help, in the 1970s and 1980s several states required combined worldwide reporting. After the U.S. Supreme Court upheld its legitimacy, multinationals turned to lobbying and succeeded in changing state laws.

As a result, most states with combined reporting allow waters’ edge reporting, and most of the handful that require  multinationals to add income from tax havens do it ineffectively. Instead of a clear list of 38 tax havens, like the Maine bill on Governor LePage’s desk, those laws invite litigation by failing to clearly define “tax haven” or otherwise fail to reach all tax haven income, according to the U.S.PIRG report.

Montana Stood Up To The Multinationals in 2003; Oregon Recently Did Too

In 2003 Montana required multinationals to report tax haven income using a clear, effective list. Dan Bucks, the Montana Director of Revenue from January 2005 to January 2013, administered the law and saw its usefulness first hand.  As Bucks explained to Minnesota Legislators who considered (but failed to pass) similar legislation:

“Administratively, there have been no noticeable costs or challenges associated with the implementation or enforcement of the law. As Director of Revenue, I received no complaints from corporate taxpayers about the law, its implementation and or its impact.”

What’s more, the law worked:

“In [tax year] 2010, the additional revenue attributable to the tax haven law was $7.2 million. That revenue was due to $102.9 million of income that had been artificially shifted to tax havens, but was now reported to Montana in proporation to real economic activity in the state.”

Oregon passed similar legislation in July, 2013. Oregon’s Legislative Revenue Office expects the state will collect $18 million more in corporate taxes in 2014, an additional $42 million in the 2015-2017, and an additional $49 million in the 2017-2019 biennium, according  to the U.S.PIRG report.

Governor LePage Is Mum For Now

Will Governor LePage enable Maine to shut this loophole or not? According to his Press Secretary Adrienne Bennett, "The Governor has the 10 days to take action on the bill. It is his policy not to comment until he has had an opportunity to review the bill in its entirety."

The 10 days will expire midnight of April 16 (Sundays don’t count, and Day 1 was Saturday April 5.) As long as the Governor doesn’t veto the bill, it will become law. And a third state’s taxpayers will see multinationals pay a more fair share of their state’s bills.