Tax Shelters Help Corporations, Hurt State Budget Coffers

Big corporations are avoiding paying billions of dollars in state income taxes by taking advantage of tax-sheltering techniques like shifting income offshore, according to a new national study, and those losses are worsening state fiscal crises.

The Multi-State Tax Commission, a consortium of 45 states unveiled the study recently. It shows that states lost more than $12 billion to corporate tax-sheltering in 2001, 35 percent of their corporate tax collections that year.

Most U.S. businesses don't engage in tax-sheltering, according to the report. The majority of the losses come from such "exotic" but legal techniques as reincorporating in tax havens like Bermuda strictly for income tax purposes; shifting income between subsidiaries; and using complex interpretations of tax laws to classify some income as arising from no particular place, when actually it's from a state that charges taxes.

The new study says, "The lost revenue attributable to domestic and international income tax sheltering is adding to the size of state budget deficits while undermining the equity and integrity of state tax systems. ... It is apparent that various corporations are increasingly taking advantage of structural weaknesses and loopholes in the state corporate tax systems." California has the biggest losses, with the study identifying a $1.34 billion loss in 2001.

There are some important issues that economic developers should pay attention to in this report. Look for more pressure on incentive programs in the future.

Read more about the study here.