Offshore tax havens cost Minnesota $2 billion a year, report says

Minnesota's big corporations, along with some wealthy individuals, are parking so much money in offshore tax havens that the state could be losing out on hundreds of millions of dollars in tax revenue.

An analysis that an interest group released Tuesday put the figure at nearly $2 billion a year, more than in all but five other states. Most of that was driven by corporate activity, but individual taxpayers accounted for about $629 million of the $1.95 billion in lost tax revenue in 2011.

"This isn't just some esoteric issue that happens in Washington, but it's something that blows a hole in state budgets at a time that states are cutting to the bone," said Dan Smith of the U.S. Public Interest Research Group, one of the report's authors.

The report arrives as Minnesotans roll up their sleeves to tackle a series of tax reforms included in the budget proposal Gov. Mark Dayton unveiled last month. The reforms include several provisions aimed at reining in corporate tax avoidance.

Minnesota Revenue Commissioner Myron Frans, who is leading the tax overhaul, said he thinks the study perhaps overstates the local impact. But he did not dispute the general findings.

"We do see a problem," Frans said in an interview. "We believe that some of the activities by companies can avoid Minnesota tax. The governor's package addresses some of these."

The report from the Public Interest Research Group found that offshore tax avoidance cost state governments across the country nearly $39.8 billion in lost revenue in 2011. It follows a similar study released last month by the nonpartisan Congressional Research Service, "Tax Havens: International Tax Avoidance and Evasion," that puts the annual cost of offshore tax strategies at about $100 billion a year.

Smith said he thinks the latest report is among the first to examine the state-level impact from lost state and federal tax revenue from the widespread use of offshore tax shelters. It defines tax havens as countries or jurisdictions with minimal or no taxes, such as Bermuda, the Cayman Islands or Ireland.

The report, "The Hidden Cost of Offshore Tax Havens," urges states to make reforms such as treating parent companies and their subsidiaries scattered around the world as one company for tax purposes, and eliminating certain tax breaks such as a production deduction originally aimed at U.S. manufacturers that has been broadened so greatly it now covers companies such as Starbucks and Walt Disney Co.

Minnesota's top five publicly traded companies — 3M Co., Best Buy Co. Inc., Supervalu Inc., Target Corp. and UnitedHealth Group Inc. — together have 46 subsidiaries located in tax havens as of 2007, the report noted.

Only Supervalu responded to inquiries, and it declined to comment.

Dayton has proposed a number of corporate tax changes, including axing two tax breaks that companies with overseas profits get when they bring the money back to the United States. Altogether, the changes will boost state tax revenue by about $323 million over two years.

"The whole goal is to reduce the tax break for companies so that everybody pays a lower rate," Frans said.

Frans said it's harder to track the use of tax havens by individuals, and the governor's proposal doesn't address that.

Dayton's reforms would also give the State Department of Revenue the authority to challenge certain financial transactions, requiring companies to prove that the moves have "economic substance" and aren't just for tax avoidance.

Sen. Dave Thompson, R-Lakeville, and ranking minority member of the tax reform division of the Senate Taxes Committee, said he thinks the report isn't "the full story." The country's high corporate income-tax rate gives companies incentives to engage in tax avoidance, he said, and that needs to be addressed. One person's loophole is another person's legitimate deduction, he noted.

Beth Kadoun, director of tax and fiscal policy at the Minnesota Chamber of Commerce, said the report paints "tax haven" with too broad a brush. There are legitimate reasons for companies to do business in other countries, she said, such as access to foreign markets or foreign investments.

It's not always about sheltering income, she said. "I really question the analysis."

But Wayne Cox, executive director of Minnesota Citizens for Tax Justice, a labor-backed group, said he thought the report was on solid ground.

"Here's the problem," Cox said. "When the tax laws allow this level of tax avoidance, taxes on other businesses and individuals have to be higher to make up the difference."

Jennifer Bjorhus • 612-673-4683