Tax avoidance tilts the playing field against small, local businesses.
A little over a year ago, Royal Dutch Shell took an unprecedented step. The company chose to make public its revenue, profits and tax payments for each country where it does business. “Businesses and society benefit when there is transparency and trust,” said Shell’s chief financial officer.
But Shell is the exception. Right now, the rule is that corporations can operate behind a veil of secrecy, making tax avoidance easier. Tax avoidance not only deprives schools and other essential services of resources, it also tilts the playing field against smaller, local businesses.
Oregon can begin to push back against tax avoidance by enacting corporate tax transparency. This would require large, multistate C- corporations to make public how much they pay in state income taxes and what tax breaks they use.
Corporate tax transparency will level the playing field for businesses, reveal where the tax system needs reform and ultimately, restore trust in the system.
Though company-specific figures in Oregon are secret, publicly available data paints a picture of widespread tax avoidance. At a time of healthy corporate profits, the tax on those profits has lagged.
Between 1980 and 2015, the profits of C corporations nationally grew nearly 650%, not adjusting for inflation. Yet over the same period, corporate income tax collections — Oregon’s tax on the profits of C-corporations — went up only 250%.
Consider the number of corporations that pay the corporate minimum tax. The most recent figures showed that seven out of 10 corporations paid just the minimum. This included half of all corporations with Oregon sales of more than $100 million.
The reasons for relatively weak corporate income tax collections at a time when profits have been strong are no great mystery. Both Oregon and the nation have seen a rise in the number of corporate tax breaks and subsidies.
It is also clear that multinational corporations artificially shift profits to overseas tax havens to avoid paying taxes where those profits were earned.
Tax avoidance comes at a cost for Oregonians. Taxes “pay for essential public services, such as health care, transport and schools,” Shell’s chief financial officer rightly noted. When some corporations avoid taxes, it means either that there are less resources for schools and other essential services or that someone else — families and small businesses — foots the bill.
Tax-avoidance strategies tilt the playing field in favor of some businesses at the expense of others — usually local, small businesses. Exploiting offshore tax havens requires having foreign subsidiaries located in jurisdictions with no (or very low) corporate income taxes.
That is why the offshoring of profits is a game that only multinational corporations play. Not surprisingly, a recent national poll found that nearly nine in 10 small-business owners view offshore profit shifting as a problem.
Tax subsidies can also tilt the playing field. A basic principle of taxation is that of neutrality, which holds that the state should not tip the scales in favor of particular actors. At the very least, it should only do so with a very good reason. Tax subsidies can advantage those businesses able to reap the subsidy.
To help level the playing field and restore trust in the corporate tax system, it is necessary to lift the veil of corporate tax secrecy. Tax transparency would allow policymakers and the public to better understand what, if any, reforms are in order. Oregon’s corporate income tax is like a car that is breaking down, making noises and sputtering. To fix it, you need to look under the hood.
The information revealed by tax transparency would allow Oregonians to know what they get for the corporate tax subsidies they pay for. It is a good business practice to understand what your return on investment is; the same is true for the state when it comes to subsidizing businesses.
Tax transparency would also shine a light on the businesses that engage in aggressive tax avoidance, as well as those that do not. At the very least, this will give consumers and businesses the option to “vote with their dollars.”
While protecting trade secrets is a legitimate business concern, tax transparency would not reveal any such information. In any event, tax transparency can be structured to minimize the risk of disclosing sensitive business information.
A tax transparency bill introduced in the 2021 legislative session allows corporations to keep their tax information secret for a period of two years before being required to disclose it.
Corporate tax avoidance will not go away by itself. Fixing the problem requires taking a look under the hood to understand what is causing it.
Corporate tax transparency is the first step in redressing a system that leaves many businesses at a competitive disadvantage, deprives public services of resources and sows distrust in the tax system.
Daniel Hauser is a policy analyst at the Oregon Center for Public Policy. Juan Carlos Ordóñez is communications director.
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