Please spare me from another story about unpatriotic, greedy, immoral companies failing to pay their fair share in taxes. Yes, companies invert as part of their tax planning strategies. Yes, inversions cost the federal government about $2 billion annually, which would cover lunch for our defense contractors. But talk about blowing an issue out of proportion. The inversion "emergency" pales in comparison with the overall problems with the American system in general and the corporate tax system in particular.
Companies invert because the stupid tax laws provide an incentive to do so. A company's decision to invert is no different from an individual's decision to live in a state without an income tax or to buy a house rather than rent to take advantage of a tax break. Yet there are people who actually make the moral and patriotic arguments against inversions. The "it may be legal but that doesn't make it right" argument is laughable. The patriotic argument -- usually made by people who had better things to do than serve their country -- is even more laughable. People and companies engage in tax planning because they want to keep more of their money. Invoking the Good Book or channeling Nathan Hale won't change that.
Elaine Povich of Stateline recently discussed the effects of inversions on the states. And increasingly, I've heard state government officials and advocates of liberal public finance doctrines whine about inversions. Stateline interviewed my colleague Martin A. Sullivan, who certainly knows a lot about the topic. Sullivan correctly noted that U.S. tax rules treat U.S. income and foreign income differently, saying, "When that is the case, the states would almost certainly lose revenue because when income is stripped out of the U.S. federal tax base, it is also being stripped out of the state tax base."
True enough. But I hope the hysteria surrounding inversions exhibited by the president, leading academics, and nationally known journalists does not become part of the state tax discussion.
Companies don't invert to avoid state corporate taxes. They've been avoiding state corporate taxes for decades. The Institute on Taxation and Economic Policy, Citizens for Tax Justice, and the Center on Budget and Policy Priorities have long been chronicling the demise of the state corporate income tax. Companies don't need inversions to avoid state corporate income taxes -- all they need is Holding Companies for Dummies.
Inversions don't pose a threat to the state corporate income tax, which needs no help in being weak. The tax has never raised much money, and it never will. That's why it should be repealed. But whether corporations act like Mother Teresa and Sergeant York and do the right thing by God and country matters none. So let's keep the hysteria at the federal level.
This post is an excerpt of an article that first ran in State Tax Notes magazine.