What the heck is ‘worldwide combined reporting’ and why do DFLers think it can raise hundreds of millions?

As she was unveiling her tax bill this week, Ann Rist, chair of the Senate Tax Committee, said her plan was to block out any tax increases. With a revenue surplus of $17.6 billion, New Hope DFLer has never held hearings on bills that have raised general taxes on funds.

Unlike the House DFL, the Senate Tax Committee didn’t address Governor Tim Walz’s request for an additional capital gains charge or the House DFL’s proposals for a new income tax class for high earners and something called “worldwide joint reporting.”

“We hoped it wouldn’t be necessary,” Rist said. “I was wrong.”

The guidance from the DFL’s Senate leadership, she said, is that her tax bill could include $3 billion in tax cuts, increased aid and tax credits, but she would need to include a billion or so in increased tax collections. That’s why the change in how multinational corporations are taxed first appeared in the Senate immediately after the tax plan was released. Late in the session, Rist conceded that few of the panelists knew much about it.

What is this? It’s called worldwide combined reporting, because it requires affiliate companies to look at their revenue from outside the United States. The change could allow Minnesota to increase its share of the corporate franchise tax by $600 million in the next two years’ budget, by $1.2 billion over four years.

But it is also risky. Minnesota wouldn’t be the only state benefiting from offshore earnings for corporate subsidiaries, and neither would any other state.

Currently, the state computes corporate tax collections based on earnings within the United States. These companies are still subject to state taxes based on their business activities within the state. But their tax bills are based on a formula that could increase government tax payments if those same companies must start including revenue from foreign subsidiaries.

Explaining it all might make a tax attorney’s eyes roll. The political bottom line is that many Democrats and liberal advocacy groups believe it is a way to combat profit shifting to offshore tax havens. It’s part of the Fair Participation Campaign, which argues that corporations don’t pay enough taxes.

“This puts our local businesses at a competitive disadvantage, and it’s wrong,” said House Tax Committee Chair Aisha Gomez, DFL-Minneapolis. “Whether aggregate reports around the world are raising $1 or $1 billion, it’s the right thing to do and I’m very proud to include that line item on the bill.”

At the same time, many Republicans and business leaders think it’s a good way to kick companies out of Minnesota — if the tax is collectible. Senate Republicans requested a briefing on the bill.

“This is a massive tax hike and we’re just trying to understand how that’s going to affect Minnesota businesses,” said Sen. Jeremy Miller, R. Winona. During a hearing Thursday, Melissa Teppe, an attorney with the state Department of Revenue, said Minnesota would be the first to go beyond what is called a “water advantage” for corporate tax purposes. The exception is Alaska, which uses only oil companies’ aggregated worldwide reporting.

Estimates of how much money it will bring in are based on academic studies and tests of a recent federal tax change that took some outside earnings.

“There is no reliable direct measure of how much income will be subject to that,” said Revenue Tax Research Director Eric Willett. He said revenue estimates are less accurate than when the agency is asked, for example, to project how much the tax rate will change for an existing tax.

“Anytime there is a proposal for something new when there is no direct measure, there is a higher risk that the estimate will be wrong,” he said, later adding, “We could be low, we could be high.”

Minnesota wouldn’t be the only state imposing such rules, and no other states do.

“Determining which entities are part of the consolidated group at the international level will be very difficult for both the taxpayer and the DOR,” said Nicely. It is already difficult to assess the current law that stops income reporting at the ‘water’s edge’. He said there was pressure from states in the 1980s to enforce the rules. But they held back due to corporate opposition and threats from foreign countries to do the same for American companies.

States like Minnesota allow businesses to claim state tax credits for taxes paid to the United States or other states so that the same profits are not taxed twice. There is no such mechanism for taxes paid to other countries, which may lead to double taxation of the same income.

Progressive tax organizations promote this method as a way to collect taxes from companies that remit profits to overseas subsidiaries to avoid state taxes. a report It was described by a group of national organizations including the US PIRG and the Institute of Taxation and Economic Policy as “a simple fix to a $17 billion loophole”.

“Each year, companies use complex schemes to shift US profits to subsidiaries in offshore tax havens — countries with minimal or no taxes — in order to reduce federal and state income tax liabilities by billions of dollars,” the report states. Instead of reducing the problems of offshore tax evasion, recent changes in federal law increase the incentive for companies to hide their earnings offshore. But even as Congress misses opportunities to address tax haven abuse, there are changes states can make to reduce the impact of offshore tax evasion on state budgets.”

So far, Minnesota is the only state trying to address this issue.

Is the suggestion of worldwide aggregate reports real?

Both the House and Senate need the tax change proceeds to keep their budgets in balance, both for the 2024-25 budget and for two years after that.

But it may be a space saver that can be redeemed later for a cash stock sitting at the target for the bond bill, the state’s construction budget. Typically, the state sells bonds to cover the costs of projects that are paid off over their lifetime, similar to a home mortgage. But the state constitution requires a 60% majority in the House and Senate to sell bonds, giving minority Republicans some negotiating power.

While the House GOP has offered enough votes to reach 60% for projects in GOP districts, Senate Republicans have held back on their support so far. To illustrate their bluff, the budget targets set by Governor Tim Walz and legislative leaders put a lot of money into capital spending — $2.3 billion.

Minority legislators use the necessary votes to get something they want. Sometimes they are projects, sometimes they are something else. Senate GOP leaders have offered a vote-for-bond deal for deeper tax cuts, notably the complete elimination of state income taxes on Social Security income.

The DFL has so far rejected it in favor of a plan that exempts about 75% of Social Security recipients from state taxes. However, a deal to sell bonds instead of using cash could save a few billion dollars for other priorities, which could include abandoning CRP worldwide. This would require Walls and leaders to increase the alleged target for tax cuts from $3 billion to $4 billion.