Taxing GILTI generates billions---state uniformity prevents evasion

Improving the taxation of the profits of multinational corporations—the topic of this Article—represents a reform that would be efficient, progressive and relatively straightforward to administer. Not only would such a reform thus represent good tax policy, but it would also raise significant revenue. And, if substantial revenue, efficiency, progressivity and administrability are not sufficiently motivating, then I will also add that it would be particularly appropriate to make these changes during the pandemic so as to raise revenue from those best able to pay during the current crisis. To be sure, the argument that states can and should tax multinational corporations (“MNCs”) more has the whiff of paradox. After all, there is general consensus that no nation-state is currently taxing MNCs very effectively and, further, that subnational governments are in an even worse position to do so. This is because MNCs can exploit the mobility of capital even more easily between parts of the same country. Nevertheless, I will argue that the American states find themselves in a particularly strong position to do better at taxing MNCs and this is in part precisely because of the missteps made at the federal level. I will briefly explain. The federal tax law passed in December 2017, known as the Tax Cuts and Jobs Act (“TCJA”), includes a number of new antiabuse rules meant to combat income stripping. Income stripping occurs when a profitable corporation engages in tax planning techniques (more on these shortly) so that profits that are taxed in a relatively high-tax jurisdiction, like the United States, are formally earned in a low or no-tax jurisdiction. One important new antiabuse rule is called the Global Intangible Low-Taxed Income (or “GILTI”) regime. The essence of how the GILTI rules work is by identifying foreign assets that are unusually profitable by means of a formula and then subjecting those excess profits to U.S. tax on the theory that they were not really earned abroad, but shifted out of the United States. The size of the income shifting problem is in dispute, but there is broad consensus that it is a large problem and one that is not going to be much improved by the new federal laws meant to combat it.5 Current respected estimates of the amount of income shifted out of the United States to low tax jurisdictions are about $300 billion per year, with the federal government projected to lose about $100 billion per year.6 The Penn Wharton Budget Model has found that the amount of income available to be taxed by the states if they tax GILTI to be in the same range (about $200 billion in 2020). Based on that $200 billion estimate, states could raise $15 billion in new revenue if they applied a 7% rate (about the current average).7 This would represent about a 30% increase in state corporate revenue.8 That is a lot of money. It is also important to keep in mind that states could borrow against a new revenue stream like GILTI in order to help pay for the immediate crisis. For the over forty states with a corporate income tax, the real question is why would they not raise this revenue from mobile capital and protect their tax base. Of course, representatives of MNCs have argued over and over that they should not and indeed that states cannot conform to GILTI.10 To date, these representatives have been successful in convincing almost all the states—even blue states, even blue states that could have really used the revenue before the current crises (I am looking at you, Illinois).11 Yet note that in many cases, states have not acted one way or the other and that states are still considering the issue.12 Even states that have affirmatively chosen not to tax GILTI can change their minds in light of recent events. Accordingly, I will argue at length in this Article (and have argued briefly elsewhere),13 that the states should and could conform to GILTI. Or, to be more precise, the states should strategically conform because, as we will see, the states should not conform to every aspect of GILTI as applied at the federal level.14 Strategic conformity means that the state should conform in ways that make the state versions of the law more effective at combating income stripping than the federal law on which it is based. Though I cannot prove it, I suspect that the ferocity with which the industry has fought state conformity to GILTI is related to a similar assessment about the possible effectiveness of state GILTI regimes as compared to the federal regime.