If a company hides Minnesota earnings overseas, what can the state do?

Should Minnesota declare war on Bermuda? Not a military action, mind you, but should we force companies based there to send us tax income earned in our state?

Why Bermuda? Well, that’s where some large U.S. corporations keep their cash, according to the Internal Revenue Service. When the IRS asked companies where they had their foreign earnings in 2014, Bermuda topped the list with $96 billion in profits in a country with a gross domestic product of $6 billion.

But it’s not the only low-tax country that has been dubbed a “tax haven.” Rep. Frank Hornstein (DFL-Mpls) says that Minnesota is losing about $38 million annually to “jurisdictions with very little taxation and very little transparency.”

So he sponsors HF1849, a bill that would require income earned by foreign corporations based in one of 35 countries that have been deemed to be tax havens to be included in their combined revenue report. Thus, they would be treated as domestic corporations and subject to taxation for Minnesota sales. In other words, the state could collect taxes on this repatriated income.

Rep. Frank Hornstein comments during discussion of HF1849 in the House Taxes Committee. Among its provisions, the bill would modify the definition of a domestic corporation. Photo by Paul Battaglia

That may sound dry, but the 75-minute debate at Wednesday morning’s House Taxes Committee meeting was anything but. Determining what constitutes fair taxation is regarded by its members as central to the committee’s role, and whether this bill is a good idea provoked lots of lively discussion. The bill was laid over for possible inclusion in the omnibus tax bill, but has no Senate companion.

Among the topics was how the Department of Revenue could determine that the bill would produce about $86 million in the next biennium: It based its estimate upon the experiences of two states with similar laws, Oregon and Montana. Beth Kadoun, vice president of tax and fiscal policy for the Minnesota Chamber of Commerce, said that Oregon has recently repealed its tax haven law.

There was also much discussion about the list of 35 countries and how it was formed: While rooted in an earlier list from the Paris-based Organisation for Economic Cooperation and Development, that organization has more recently released a controversial report with only one country on it, Trinidad and Tobago.

Rep. Aisha Gomez (DFL-Mpls) spoke in favor of the bill. “This is a way that the largest, most powerful corporations with the richest CEOs and the most enriched shareholders in the world are using beneficial tax arrangements in other countries to not pay their fair share of taxes in the country where they’re doing business, where the public invests in education for their workers, in roads for them to move their goods around.”

Rep. John Petersburg (R-Waseca) responded by saying, “We probably have tax haven states where corporations base their headquarters in other lower-taxed states. Is that where we’re going to go next?”

The committee chair, Rep. Paul Marquart (DFL-Dilworth), offered a brief history lesson on how tax laws changed in the 1980s to pressure states not to seek to recoup revenue lost to companies that move their headquarters to tax havens.

“Is it legal? Yes, but I don’t think it’s fair,” Marquart said. “That’s something like $6 billion a year that Minnesota is losing. Even the federal government recognizes that this is a problem.”

“We have a fundamental problem here,” Hornstein said. “The question before us as legislators is what will be the state’s response. This money shouldn’t be sitting there in these foreign countries. It’s my hope that we can put some of this money to work for the people of Minnesota by dealing with it in state policy.”