Don't let tax cheats block tax justice in Minnesota

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I know corporate tax-dodging. I was executive tax counsel at a Fortune 10 multinational corporation and leader of a 600-person "state tax minimization" group at a Big 4 accounting firm.

Now I work to shift the balance of power toward inclusive prosperity. So I battle my former colleagues.

Right now, the Minnesota Legislature is deadlocked in a battle between tax cheats and tax justice. Minnesota could strike a major victory by passing a tax bill that includes "worldwide combined reporting." Allow me to explain:

During my decades as a professional enabler of my clients' tax-dodging, avoiding Minnesota corporate income tax was easier than falling off a log after a long day of portaging in the BWCA. Then as now, the culprit is the "water's edge election" — a nasty little accounting rule that allows big corporate groups to shift their Minnesota-taxable profits into offshore tax havens where they escape taxation entirely.

Imagine it this way: You're wearing your favorite pair of jeans. The left pocket's stuffed with a wad of cash that the state is entitled to tax. But Minnesota can't touch your right pocket, so you move that cash over. The money is still yours; it's still in your pants; but now it escapes taxation.

That's the water's edge election. Your pants are a multinational corporation, that wad of cash is billions in profits from sales to Minnesota customers, and your right pocket is a subsidiary in an offshore tax haven. By moving that cash with some slick restructuring — the kind of miserable trickery I was really good at — you cheated Minnesota out of millions in tax revenue.

Worse, hardworking Minnesota families pick up the tab through higher taxes and lost public services.

Enough bad news; here's the good: It's easy to shut this tax avoidance down. Just ash-can the water's edge election and replace it with "worldwide combined reporting." That rule reflects reality: It treats those two pockets as what they are — parts of a single pair of pants. Move your Minnesota profits around your pockets as much as you like, smart guy. With "worldwide combined reporting," the state taxes it fair and square.

For precisely that reason, many leading experts love worldwide combined reporting while tax avoiders — like my former colleagues who make a killing as enablers — absolutely hate it.

Minnesota was on track to adopt this easy fix until my old friends got up to their old tricks, trying to kill sound tax policy with a one-two punch of tedium and threats. The wonks tried to bore you into surrender with complaints of complexity, calculations and cries of "administrative burden!" The scaremongers foretold trade wars and endless litigation.

They threw it all against the wall like day-old spaghetti to see what stuck and — surprise! — the business media caught every noodle. Even the Wall Street Journal joined in, targeting civil servants with a condescending critique (later proved erroneous) of a revenue estimate.

Setting the business media straight, a group of top economists and law professors responded with a letter to Minnesota's tax conference committee, detailing their support for worldwide combined reporting and refuting objections:

● "Minnesota companies will flee the state!" No chance. Under worldwide combined reporting, the only way to dodge Minnesota taxes would be to stop making profitable sales into the state, which corporations obviously wouldn't do.

● "It's too much work!" Funny. Tax dodgers will "run the numbers" until the cows come home if it'll help them avoid taxes.

● "We're gonna sue your (insert body part here)!" The U.S. Supreme Court has upheld the validity of worldwide combined reporting. Twice.

● "You'll trigger an international tax war!" In contrast to the 1980s, Europe is now actively cracking down on international tax cheats too.

● "Your revenue number's off!" Quibbles over precision (other states' estimates confirm Minnesota's in the ballpark) distract from the larger point: Tax avoidance degrades the rule of law, inclusive prosperity and the stability of our democracy.

It's all nonsense aimed at tricking you into believing that corporate tax avoidance is a minor and unsolvable inconvenience, like bad weather at a picnic. But corporate tax dodging is a serious injustice and there is something you can do about it. It's not too late.

Minnesota's support for worldwide combined reporting demonstrates exceptional leadership. Now finish the job.

Don Griswold is a constitutional tax lawyer, fiscal justice columnist and public interest policy consultant, previously executive tax counsel at Berkshire Hathaway. He writes the "(Re)Thinking Tax" column for Bloomberg.