Opinion: Close tax loopholes to fix Michigan roads
In October, the Michigan legislature struggled with a tough budget showdown. Legislators grappled with a number of pressing concerns, and high up on the list was the need to repair thousands of miles of damaged roads throughout the state.
Fixing the state’s infrastructure remains a priority for many voters. But the sticking point has been how to pay for it. Gov. Gretchen Whitmer's proposed 45 cent per-gallon gas tax didn't make it into the final budget, and the eventual $59-billion package actually saw a $2.4 million cut in transportation spending.
Michigan’s roads are still crumbling, and it’s estimated that overall repairs will cost $2 billion. But what if the state could start generating an extra $300 million in tax revenue each year? That additional income could certainly help to close longstanding budgetary gaps.
The solution is for Michigan to start requiring multinational corporations to pay their fair share of taxes. It’s an issue that Americans have undoubtedly become familiar with — brazen corporate tax avoidance. Amazon, for example, paid zero state or federal taxes in 2018, despite earning more than $11 billion in profits. Dozens of other Top 500 firms also paid no federal taxes in 2018.
Michigan’s own manufacturers are certainly paying their share of state taxes. What’s galling for them is having to compete against multinational firms who earn billions of dollars in profits in the United States — but pay little or no U.S. taxes.
A good example of this kind of corporate tax avoidance is the pharmaceutical company AbbVie, maker of the arthritis drug Humira. In 2017, AbbVie reported worldwide sales of over $28 billion, with roughly 65 percent of that in the U.S. alone. Amazingly, AbbVie reported a U.S. loss of more than $2.6 billion.
How do companies like AbbVie get away with it? They establish subsidiary operations in low-tax countries like Bermuda and the Cayman Islands. Doing so allows them to say that they’ve already paid their tax obligation. What AbbVie did was to sell many of its roughly 136 Humira patents to a subsidiary in Bermuda. Now, AbbVie reports a huge loss in the U.S. each year — since its U.S. profits become operating “expenses” needed to pay royalties on its own product. All this despite AbbVie basing most of its research facilities in the U.S. Amazingly, AbbVie’s annual reports show that it has never reported a profit in the U.S.
The answer is for Michigan to change its tax code. Like many other states that impose a corporate tax, Michigan allows companies to utilize something called a “water’s edge” principle when calculating their tax obligation. Water’s edge gives them the option to report only U.S. sales and expenses. And that means multinational corporations like AbbVie can say they paid heavy expenses to an overseas subsidiary. As a result, they operated at a loss in the U.S.
Michigan can start reclaiming lost tax revenues by repealing the “water’s edge” option. Doing so would mean multinational firms no longer avoiding taxes on highly profitable U.S. sales. The Institute on Taxation and Economic Policy (ITEP) has determined that if Michigan were to end water’s edge — and close tax loopholes for multinationals — it could gain an additional $321 million in annual tax revenues. That’s a huge windfall — and not a cent of it would be paid by Michigan’s hard-working residents.
It’s time for Michigan to repeal the "water’s edge" option. It’s the logical response to a changing global economy that unfairly tilts Michigan’s tax code in favor of multinational firms rather than the state’s own domestic businesses. Fully taxing the profits of multinational corporations would establish tax fairness, and could generate revenues needed to finally fix the state’s failing roads.
Bill Parks is an MSU alumnus and a founder of NRS Inc., an Idaho-based sporting goods manufacturer.