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Montana Viewpoint

CORPORATE TAX AVOIDANCE IS LEGAL, BUT IS IT A VIRTUE?

April 12, 2004

Any Montanan who paid over $500 in Montana income taxes this year paid more tax than 200 of Montana’s biggest corporate taxpayers. These are national and international corporations with between $5 million to $795 million in Montana gross revenues. Nice work if you can get it, but you can’t get it without a substantial investment in tax avoidance experts, and that’s something that small businesses and individuals generally can’t afford.

Between 1996 through 2000, 60% of American corporations and 70% of foreign corporations paid no federal income tax. In 2003 the share of total federal revenue paid by corporations was at its second lowest point since 1934, in the midst of the Great Depression. This is important to Montana taxpayers because Montana corporate income tax is tied directly to the Federal corporate income tax; as federal tax collections go, so go Montana’s.

It’s also important to Montana taxpayers because every dollar that big national and multinational corporations avoid paying costs Montana’s small businesses and individuals; either in increased taxes or decreased government services such as education, fire protection and law enforcement.

There are many inventive and ingenious—and for the most part legal—ways big business can avoid paying taxes, including off-shore tax havens and sophisticated accounting techniques. I won’t enumerate them here, but, as the “old perfesser” Casey Stengel said, “you could look it up.” The IRS is increasingly incapable of policing corporate tax compliance. They’re still finishing up 1997 audit work, and the “creative accounting” of Enron and others was news to them. It shouldn’t have been.

Defenders of big business counter with the usual arguments. Income taxes aren’t the only taxes big corporations pay, they pay property taxes, too. Yes, but so do Montana’s small businesses and homeowners. Out of state corporations provide jobs. Yes, but 93.4% of the jobs in Montana are provided by businesses with 9 or fewer employees and sole proprietorships.

High on the list of objections to collecting income tax from big businesses is the argument that Montana has a high reliance on business taxes. A recent and much cited study on the subject found that Montana ranks 8th highest in the nation. The question is: compared to what? Except for Idaho (35th), surrounding states have equal or greater reliance on business tax revenues: Alaska (1st); Wyoming (2nd); South Dakota (4th); North Dakota (9th). If there is any relationship, it’s just as arguable that states with small populations get a greater proportion of their tax income from business taxes. It’s more a matter of demographics than tax structure.

Yes, Judge Learned Hand, a great American jurist said, ”There is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible," but just as citizens have a responsibility to society to be good neighbors, so do corporations. To the extent that anyone is able to avoid paying taxes, citizen or corporation, it puts a greater burden on other taxpayers. We in Montana have given large tax breaks to multi-state and multi-national corporations, with little return in job creation.

Because of the confidentiality of corporate tax records, we can’t know what economic circumstances lead to corporations not having a tax liability in a particular year other than that they report a loss. It’s the accounting behind that loss that remains a mystery to us; it may be legitimate, it may be otherwise. Notwithstanding, they do consume government services in Montana, and should pay for them the same as everyone else. The Federal government has an “Alternative Minimum Tax” to prevent individuals from hiding income in tax shelters; perhaps we should institute one on the corporate level in Montana.

It is far more appropriate that we give greater tax breaks to everyday Montana businesses than we now do. That’s where the growth in Montana’s economy will come; but we are ill equipped to afford that tax relief if the world’s largest corporations don’t pay their share of Montana taxes.

 

Jim Elliott
Phone: 406-444-1556
Mail: State Senate Helena, MT 59620

jim@jimelliott.org