Corporate Tax Loophole Costs Hawaii $38 Million Annually

Feb 20, 2019

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Hawaii lawmakers are missing out on millions in potential tax revenue. That is the conclusion of a report from the Institute on Taxation and Economic Policy. The ITEP found that a loophole in Hawaii's tax code allows multinational corporations to avoid paying state corporate income taxes, resulting in a loss of $38 million in revenue annually.

Nationwide, 23 other states have similar loopholes. The estimated combined value of that forgone tax revenue is more than $17 billion. But there is nothing illegal about the situation.

Federal tax codes do not require multinational corporations operating in the U.S. to report their financial information to state tax authorities. The result is that the profits those companies generate in individual states are not taxed unless that state specifically requires reporting.

27 states use what is called "Combined Reporting" in which companies report their entire domestic profit to state authorities. The states then estimate the share of those profits that were generated in their state and tax that share at the corporate income tax rate. 

Hawaii currently uses combined reporting for national companies operating solely in the United States, but not multinational companies oeprating globally. IETP recomends countries enact a Worldwide Combined Reporting system to prevent companies from hiding profits in so-called tax havens, low tax jurisdictions found around the world.

The Hawaii state legislature is not considering any bills in the 2019 session that would close the multinational corporate tax loophole locally. 

Read the full IETP report here.