A report released last week by the nonprofit, non-partisan Institute on Taxation and Economic Policy found that the State of Hawai‘i could increase tax revenue by $38 million through addressing offshore tax havens. Loopholes in the tax code allow corporations to avoid taxes by shifting earnings made in the U.S. to locations like the Cayman Islands, where there is little to no levied tax, resulting in an annual loss of $17 billion nationally, the report states.
Titled “A Simple Fix for a $17 Billion Loophole,” the report explains how some large companies dodge paying their fair share of taxes. “With their armies of tax lawyers and accounting specialists, companies have many strategies for booking profits offshore,” it states. “Some transfer their patents or trademarks to subsidiaries located in tax havens and spend their domestically earned income to pay tax-deductible royalties to the subsidiary to use the patents or trademarks.”
Offshore tax haven abuse has long been a hotly debated subject within the subject of tax reform, and the report offers two solutions. The first, already in effect in Hawai‘i, is combined reporting. This requires companies to “combine their activities across related subsidiaries and apportion their profits based on relative business activity state-by-state,” the report explains. Combined reporting discourages companies to shift domestic profits to a zero-tax state like Wyoming.
The second, which could increase Hawai‘i’s tax revenue by $38 million, is worldwide combined reporting. This approach, called the “gold standard for closing tax loopholes” and set to be enacted in Oregon this year, would require companies to report their worldwide income (including foreign subsidiaries) and use a formula to determine the portion of reported profits that will be taxed by the state.
Such reform is popular, the report claims. “A survey by Greenberg Quinlan Rosner Research on behalf of Small Business Majority found that seven in 10 small business owners feel their business is harmed when larger businesses avoid taxes. The survey also found that 85 percent believe the tax code unfairly benefits large corporations over small businesses.”
Yet, despite a number of proposed changes to the tax code, a review of introduced bills for the 2019 Hawai‘i State Legislature shows that closing tax haven loopholes is not on the agenda for this session. That isn’t to say state representatives and senators are completely unaware of tax unfairness, however: the state house and senate both introduced a number of bills include to institute conveyance taxes for foreign corporations, remove limits on the transient accommodations tax, institute progressive taxes on higher incomes, and tax shareholder dividends paid out by real estate investment trusts.
In today’s environment, where billionaires are getting richer while the poorest half of the world is losing wealth, these kinds of tax reforms can’t come soon enough.
View bills introduced in the Hawai‘i State Legislature at Capitol.hawaii.gov.
Image courtesy Flickr/Paul Bailey