Report: Maine losing $52 million annually to corporations using offshore tax havens

The U.S. government loses roughly $100 billion in tax revenue each year due to corporations that shield their profits from the IRS by using offshore shell companies. While such tax avoidance schemes are largely seen as a problem at the federal level, a new report shows that Maine is paying a price too.

“Huge corporations like Apple, Exxon Mobil, and Pfizer establish shell companies in offshore tax havens — countries with low or no corporate income tax — as part of a complex international accounting scheme to reduce their income taxes by moving their U.S.-based profits out of reach of the IRS,” writes policy analyst Sarah Austin in a Feb. 5 report on tax havens by the Maine Center for Economic Policy (MECEP).

“It’s a complicated shell game. But while offshore tax haven abuse is an international phenomenon, it hits home here in Maine,” she writes.

Austin found that offshore tax haven abuse costs Maine up to $52 million in local taxes annually.

The report details how these corporations skirt by.

U.S.-based corporations “sell” their goods at no cost to their offshore shell company. The transaction exists only on paper while the goods possibly never leave the U.S.. However, when the goods are sold to customers it is recorded as a profit made by the shell company. This way, they have no tax liability.

This impacts Maine because the state calculates income taxes from national businesses that operate in the state based on the percentage of U.S. sales generated within the state’s boundaries.

“For example, if three percent of a corporation’s nationwide sales took place in Maine, that corporation would owe Maine income taxes on three percent of its total nationwide profits,” Austin explained. “That’s why even though a company such as Amazon is headquartered in Washington state, it still owes taxes to Maine.”

Maine tax payers bearing the cost

So when corporations artificially lower their U.S.-based profits, the state of Maine also sees less tax revenue and as a result Maine taxpayers have to make up the difference.

“We all pay taxes to fund our roads, our schools, and our public services — all of which help businesses by creating a strong economy,” Austin wrote. “Corporations benefit from our educated workforce, our transportation infrastructure, and our public safety services. They should pay their fair share for the investments that create the conditions for their success.”

The amount of money U.S. companies move through tax havens is considerable. Fortune 500 companies made $2.6 trillion in offshore profits in 2016, according to the Institute on Taxation and Economic Policy.

And the argument that lower corporate tax rates would reduce the problem has not borne out. MECEP reports that the vast majority of tax haven abuse remains intact even after the $1.5 trillion in tax cuts through the GOP’s 2017 Tax Cuts and Jobs Act, which significantly lowered the average corporate tax rate.

While the analysis notes that the greatest place for meaningful policy to address tax havens is at the federal level, MECEP argues that state lawmakers can still take steps to stop corporations from avoiding Maine income taxes for example, by treating foreign profits the same way Maine treats profits generated in other states, or by specifically targeting profits in known tax havens.

“These relatively straightforward policy solutions would help ensure corporations making profit off Mainers are paying their fair share for the investments Maine makes in its economy,” MECEP added.

Photo by Allison Harger | Creative Commons via Flickr