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Hartford - Two state legislators want to change Connecticut law that allows corporations and individuals to shift their earnings to "tax havens," or jurisdictions where they have little or no tax liability.
State Rep. Susan Johnson, D-Willimantic, recently proposed a bill to address tax havens, and Rep. Diana Urban, D-North Stonington, agreed the law needs to change. But Joseph Brennan, a senior vice president for Connecticut Business & Industry Association, said that such legislation, at least on the state level, could negatively impact business investment in the state.
"When you throw out these proposals, all it does is reduce confidence in the state," Brennan said. Connecticut needs investment and tax policy that encourages investment and makes the state competitive, he said, not a tax policy that would inhibit them.
Others argue that preventing corporations and individuals from sending assets to tax haven countries would be one way to close the state's continual budget deficit.
In 2011, Connecticut lost $904 million in revenue because of such practices, said Abe Scarr, director of Connecticut Public Interest Research Group Education Fund, based in West Hartford. The group released a report last week on the topic.
"I can't understand why people, why the average person, who is busting their fanny every day, you know, on shift work, and paying their taxes like a good person, why they don't say anything," Urban said.
At a Senate hearing last year, Microsoft Corp. was used as an example. It developed software products in the United States but sold intellectual property rights for those products to offshore subsidiaries in low-tax jurisdictions, according to a 2012 report by the U.S. Senate Permanent Subcommittee on Investigations.
The bulk of the profits from the sale of the products around the world were shifted to the subsidiaries outside of the United States to avoid paying U.S. taxes, the report said. When Microsoft designed the products, it took advantage of research and development tax credits here but later avoided paying a large portion of U.S. taxes.
In total, states lost $40 billion in tax revenue because of tax havens, according to Conn PIRG's report. The federal government loses about $150 billion annually, according to the report.
The use of tax havens is pervasive, said Dan Smith, federal tax and budget advocate for ConnPIRG.
In 2008, the federal Government Accountability Office found that 83 of the 100 largest publicly traded corporations in the country kept revenues offshore in tax-haven jurisdictions. In Connecticut, those companies included insurance giants Travelers and Aetna, Hartford Financial Services, United Technologies Corp. and General Electric.
Hartford Financial and Travelers declined to comment for this article, and the others did not respond to a request for comment.
'Combined reporting' debated
There is a lot of confusion over how much money is actually housed offshore and how much money potentially could be taxed, Smith said.
"Some companies voluntarily disclose how much money is sitting offshore and therefore untaxed in the U.S.," while others do not, he said.
ConnPIRG is recommending states act, rather than waiting for the federal government to change tax laws. The organization recommends "combined reporting," which means the parent company and the subsidiary companies all would be considered one company for tax purposes, Smith said.
Nearly half the states do this, but not Connecticut, Scarr said.
Whether switching to combined reporting will help states obtain more tax revenue is a point of contention. In 2010, the National Conference of State Legislators researched the issue and found there was no evidence that combined reporting enhanced tax revenues. The organization based its study on New York and Vermont, which recently had switched to combined reporting.
States that have switched recently to combined reporting are involved in lawsuits, said Bonnie Stewart, a CBIA vice president. Combined reporting is complex, and state government and businesses disagree on which subsidiary branches have to be included in the combined return.
Connecticut has a "system with very little litigation," she said. "Why would you want to switch and go to a system that has cases being disputed for over 20 years, waiting for revenues?"
Urban said she agreed that corporations would put up a fight to such changes. "The question is, do you take a hit up front (in lawsuits) or forever leave it alone?" she said.
The state is missing out on a significant amount of revenue, she said. The way to get the federal government to move on the issue is for states to act first, she said.
Brennan, of the CBIA, said many midsize and small companies engage in international trade and don't want a tax policy that inhibits them.
Changes that affect corporations in the United States should come from the Internal Revenue Service, he said.
"You can't deal with that on a state-by-state basis," he said.