State Net Capitol Journal – July 9, 2012

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Budget & Taxes

AMERICA'S ON-SHORE CORPORATE TAX HAVEN: The unassuming office building located at 1209 North Orange Street in Wilmington, Delaware may not look like it, with its faded awning and parking garage view, but it's home to some of the most successful corporations in America, including Apple, Coca-Cola and Ford - at least on paper. In fact, 1209 North Orange is the legal address of no less than 285,000 businesses.

What has attracted so many companies to this particular address is the same thing that has attracted so many to Delaware in general: the state's exceedingly liberal corporate tax laws. The state regularly tops lists of tax havens worldwide because it allows companies to reduce their taxes in other states where they do business or are headquartered by shifting royalties and other revenues to holding companies in Delaware, where they aren't taxed, an arrangement known in tax circles as "the Delaware loophole."

That loophole has drawn hundreds of thousands of businesses to the state. Over 133,000 set up shop there last year. Nearly half of all U.S. public corporations are incorporated there. And according to the most recent tally, there are actually more corporate entities residing in the state than people, roughly 945,000 versus about 898,000.

"Companies choose our state and we are proud of it," said Richard J. Geisenberger, Delaware's chief deputy secretary of state "We spend a lot of time in the United States and traveling internationally to let people know that Delaware is a great place to do business."

Business has evidently been good, both for Delaware and for the companies that have taken advantage of its tax laws. The state took in roughly $860 million in taxes and fees from its absentee corporate residents last year, about a quarter of its total budget. And it's estimated that the Delaware loophole has saved corporations $9.5 billion in taxes over the past decade.

Not everyone is happy about Delaware's arrangement, however, especially officials in locales more widely known for their favorable tax climates.

"You can have companies in Delaware that have no U.S. bank accounts, no requirements for documentation and no one knows who owns them," said Anthony B. Travers, chairman of the Cayman Islands Stock Exchange. "There should be a level playing field and Delaware should have to comply with the same standards as the Caymans."

For American companies, Delaware offers some distinct advantages over its offshore counterparts. For one thing, the profits of entities set up in Delaware aren't subject to the federal tax that profits of foreign-based entities are when they're brought home to the United States. Delaware also doesn't carry the stigma that the Caymans and Bermuda do. In addition, there's the simple geographic advantage. As Richard Murphy, a senior adviser for the London-based Tax Justice Network, which researches tax havens, put it: "Why go to the Caymans when you can just go down the street?"

But officials within the United States say the same laws that attract legitimate businesses to Delaware to lower their tax burdens also draw drug traffickers and embezzlers looking to set up shell companies - those without employees, assets or any real business - to launder money.

"Shells are the No. 1 vehicle for laundering illicit money and criminal proceeds," said Lanny A. Breuer, assistant attorney general for the criminal division of the Justice Department. "It's an enormous criminal justice problem. It's ridiculously easy for a criminal to set up a shell corporation and use the banking system, and we have to stop it."

Jack Abramoff, the former Washington lobbyist convicted of corruption, used a Delaware-based shell corporation to hide millions of dollars in payments. And Viktor Bout, the Russian arms dealer known as "the merchant of death" who was recently sentenced to 25 years in federal prison on terrorism charges, employed two Delaware addresses.

Some U.S. officials have also taken exception with the lack of transparency of Delaware's corporate tax system, as well as that of other states, including Nevada, Wyoming and Oregon. Since 2000, U.S. Sen. Carl Levin (D-Michigan) has been trying to get Congress to pass legislation requiring states to collect information on the ownership of companies that incorporate within their borders. But his effort has been blocked by powerful opponents, including the National Association of Secretaries of State (NASS), the American Bar Association and the state of Delaware, which has a senator - Democrat Thomas R. Carper - who is next in line to chair the committee that has jurisdiction over Levin's recurring measure. "Levin is hitting a brick wall," said Heather Lowe, director of government affairs for the anticorruption research group Global Financial Integrity. "It's frustrating. Delaware is playing a significant role in the committee. Senator Carper is well liked and well respected and he's not moving on this issue."

Delaware and the NASS contend that Levin's measure would discourage business, be difficult to implement and unlikely to deter crime.

"This would be a sea change in how things are done," said Nevada Secretary of State Ross Miller, who is also president-elect of the NASS. "It would add red tape and increase processing time. And if you had a money launderer and asked for his name, he probably wouldn't be truthful."

One state that may not be inclined to accept the status quo, however, is Pennsylvania. Over 400 of the companies involved with drilling for natural gas in the state's Marcellus Shale region have opted to incorporate in Delaware. More than two thirds of those in the Marcellus Shale Coalition call 1209 North Orange Street their home. And the non-profit Pennsylvania Budget and Policy Center estimated in 2004 - before the energy boom - that the Delaware loophole cost Pennsylvania $400 million a year in revenue.

"So many of these Marcellus Shale companies have figured out that it is fairly easy to siphon profits from Pennsylvania, so that they don't pay taxes here," said the center's research director Michael Wood.

But Delaware doesn't appear inclined to change its corporate tax policy any time soon.

"We have a system that is the greatest creator of wealth in the history of the world," said Chief Deputy Secretary of State Geisenberger. "We will not support any changes that change the friendliness of American business and close our doors to capital formation and the ease of doing business." (NEW YORK TIMES)

POOR CHOOSE FOOD STAMPS OVER WELFARE DURING RECESSION: Twenty million more Americans receive food stamps now than did before the start of the recession. But there are actually fewer Americans collecting welfare than in 2005. Rhode Island's welfare caseload has dropped by 29 percent, despite the fact that its peak unemployment rate, at 12.7 percent, was the third highest in the nation.

Advocates for the poor say the food stamp program worked as it was supposed to during the recession while the welfare system showed it's not well-designed for hard economic times.

"[Welfare] is the outlier in its lack of responsiveness," said LaDonna Pavetti, a poverty and welfare specialist at the Center on Budget and Policy Priorities (CBPP).

Food stamps are an entitlement program; anyone who qualifies for the program receives the benefit. During the recession the program's costs have soared: the federal government spent nearly $76 billion on it last year, more than twice the $33 billion it spent before the recession. But when Congress overhauled welfare in 1996, it changed the program from an entitlement to a roughly $16.5 billion annual block grant to states, known as Temporary Assistance for Needy Families (TANF), which states are free to dole out as they wish. Rhode Island's cost savings, for instance, came from both shortening its time limit for receiving benefits and cutting off the families of recipients and not just the recipients themselves when they reached their time limit, according to the CBPP.

The welfare program also has tighter work requirements than the food stamp program. Jessica Bartholow, a legislative advocate at the Western Center on Law and Poverty, said the TANF work requirements are actually too rigid.

"A low-income parent was held to the same work rules during the worst economic downturn of our lifetimes as they were when unemployment was single digit," she said.

Bartholow also has concerns about the lifetime limit on TANF benefits, which in most states is five years, but in several states, including Arizona, California and Michigan, has been shortened to four years or less.

Many Republicans in Congress, however, don't see the welfare system as flawed but rather as a model for what needs to be done with the food stamp program. U.S. Sen. Rand Paul (R-Kentucky) recently proposed a measure that would have capped food stamp funding at $45 billion per year and converted the program to block grants to the states. 
 
"It's out of control," he said. "It's not about helping those in need. It's about being wise with the taxpayer dollars and not giving people $20,000 a year in food stamps."

Tad DeHaven, a budget analyst for the libertarian Cato Institute, said, likewise, that the focus should be more on food stamps than on TANF because that's what the federal and state governments are spending much more of their money on. Indeed, welfare spending makes up less than 2 percent of all state spending, according to the National Association of State Budget Officers.

But there is a growing concern that no one really knows how the TANF money is being spent.

"We've been particularly concerned about a small, but possibly growing portion of families that were eligible for [welfare benefits]...and did not receive cash benefits," Kay Brown, director of income security for the U.S. Government Accountability Office, told a U.S. Senate committee last month. (STATELINE.ORG)

BUDGETS IN BRIEF: The MISSOURI Supreme Court has unanimously rejected a legal challenge to a voter-approved law requiring periodic elections to decide whether to retain municipal earnings taxes. Voters approved a statewide ballot measure in 2010 requiring Kansas City and St. Louis to hold elections every five years on whether to keep those taxes, but two Kansas City leaders had filed a lawsuit challenging the voter-approved measure on the grounds that it mandated an election without providing funding and improperly amended the city's charter (ASSOCIATED PRESS, STLOUISTODAY.COM). • NEW JERSEY Gov. Chris Christie (R) ordered lawmakers back to Trenton on July 1 to address the tax cut they failed to grant him in the state budget he signed last month, which he said holds "tax relief hostage." The $31.7 billion budget Democrats who control the state's Legislature sent Christie on June 25 delays that tax cut until state revenues show signs of meeting the ambitious revenue targets the governor has set (BLOOMBERG, STATENET.COM). • PENNSYLVANIA collected more than $1.3 billion in taxes on slot machine revenue in the fiscal year that ended on June 30, according to the Gaming Control Board. Slots revenue was up 4.76 percent over last fiscal year and has increased 438 percent since the first slots casino opened in the state in 2006, pouring about $6 billion into the state's coffers (TRIBLIVE.COM).

- Compiled by KOREY CLARK

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