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Group Urges States to Take Lead in Offshore Tax Crackdown

A consumer advocacy group is urging states to get ahead of Congress in cracking down on offshore tax avoidance that costs states an estimated $40 billion in annual revenue.

State governments can take several steps to collect revenue from wealthy individuals and corporations, even if those actions are not matched on the federal level, the United States Public Interest Research Group says in a report released Tuesday.

Although states typically offer individuals and businesses the same tax benefits as the federal government, states have the ability to “decouple” their tax systems from the federal tax system. For example, 22 states and the District of Columbia do not offer a version of a federal tax deduction for manufacturers, and more than 30 states do not provide firms with an investment incentive that exists at the federal level, according to U.S. PIRG.

States could protect their tax base even more by opting out of a federal tax break for multinational financial firms, the group says.

Alternatively, states could reject the current practice of deferring taxes on profits businesses earn overseas until those profits are returned to the U.S. in the form of dividends. States could adopt a “worldwide” system of taxation, U.S. PIRG says, by taxing a share of all profits earned by multinational corporations based on their level of activity in each state.

The group notes that 23 states have already take a similar step by treating the parent and subsidiary companies of multistate corporations as a single business to recoup revenue that is lost when companies shift earnings to low-tax states.

Using two previous academic studies as a guide, U.S. PIRG estimates that offshore tax avoidance and evasion cost states a combined $39.8 billion in 2011.

Democrats in Congress have long complained about businesses that limit the amount of taxes that they owe by shifting profits to low-tax jurisdictions. Senate Armed Services Chairman Carl Levin, D-Mich., who is working on a package to replace the $85 billion in fiscal 2013 spending cuts due to begin March 1, has promised to target “offshore tax havens” in his legislation.

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