by Jordan Schneider
Earlier this week, Pulitzer Prize-winning reporter David Cay Johnston took to the op-ed page of the Sacramento Bee to highlight a powerful new argument for closing offshore tax havens: the impact on state budgets. Johnston pointed to our recent report, which found that state budgets lose a combined $39.8 billion in tax revenues each year to offshore tax haven abuse.
In the report, we estimated state-by-state revenue losses using a methodology designed by U.S. PIRG Education Fund’s tax and budget analyst Phineas Baxandall, who pointed out that many of the tax loopholes that allow U.S. multinational companies and wealthy individuals to avoid federal income taxes by hiding profits offshore are also allowing them to avoid state income taxes. This leaves states to make up the difference by increasing taxes on others, cutting services, or taking on more debt.
Incredibly, despite the massive fiscal impact on states, few tax experts or policy-makers have made the connection between the federal tax code’s lax provisions and state revenue.
Johnston writes, “Before writing a column about this for nonprofit Tax Analysts, publisher of ‘State Tax Notes,’ I asked 13 tax folks, plus my CEO wife, about state governments losing revenue to offshore tax havens. Not one of these people had ever given the problem a thought, though it seems obvious once you focus on it.”
In his column for State Tax Notes, Johnston extrapolates from our findings that abuse of offshore tax havens reduced California’s income tax collections by about half—a number that seems startlingly high, he says, until one considers all of the large high-tech firms located there and how such firms are particularly prone to offshore tax dodging.
Additionally, in his is Sacramento Bee piece, Johnston concludes:
- The $7.15 billion that California lost to offshore tax haven abuse was the equivalent of a 15 percent surcharge on residents’ state income tax bill.
- It would also have been “enough money for the Legislature to declare a state income tax holiday from Nov. 10 to the end of the year, giving a boost to [residents’] take-home pay just before the expenses of Thanksgiving and the holiday shopping season.”
- The amount of individual income tax avoided by wealthy individuals—about $2.94 billion—would have been enough “to make the University of California tuition-free, saving parents and students $2.97 billion.”
Corporations and wealthy individuals that are based in the United States and earn their profits here should pay the taxes that they legitimately owe. Lawmakers at both the state and federal levels should close loopholes that allow and encourage the abuse of our tax system through the use of offshore tax havens.