CORPORATE TAX LOOPHOLES IN MISSOURI: THE REAL STORY

Transcription

1 CORPORATE TAX LOOPHOLES IN MISSOURI: THE REAL STORY Missouri Citizen Education Fund By: Robin Anderson and Kelle Rose April 2003 Is Geoffrey the Giraffe dodging taxes in Missouri? St. Louis Office Kansas City Office 5585 Pershing Ave. Suite Paseo Ave. St. Louis, MO Kansas City, MO Tel Tel Fax Fax Labor Donated

2 Introduction Missouri faces a $1 billion budget shortfall for the fiscal year that starts July 1, The House Republican plan proposes to remedy the budget crisis with sweeping cuts to educational and social programs. Their cuts include $300 million for elementary and secondary education that could result in layoffs for 5,000 K-12 teachers. Social services will be cut by $80 million, possibly impacting programs like the Children s Health Insurance Program (MC+). House Republican leadership is unwilling to close corporate tax loopholes to avoid such cuts. Governor Bob Holden s budget plan proposes to close eleven corporate tax loopholes in order to prevent some of these cuts. Closing all of the eleven loopholes would generate $186 million in state revenue and allow the state to minimize cuts in elementary education, health care, and higher education. In this report, MCEF will review five common arguments made by those who oppose closing corporate tax loopholes. We will test these arguments by examining one particular loophole, the Geoffrey Loophole. The report will explain these five myths as they relate to the Geoffrey Loophole and compare that with the reality. The Geoffrey Loophole, coined after Toys R Us, Inc. s Geoffrey the Giraffe logo, is one of the corporate tax loopholes Gov. Holden has proposed to close. Closing the Geoffrey Loophole would generate $15 million for the state of Missouri. This corporate tax loophole allows a major corporation to establish a patent company in states such as Delaware or Nevada that do not tax trademarks and patents. This dummy corporation then charges a royalty to its stores in states like Missouri for the use of the trademark or patent. Delaware does not tax the royalties because it exempts income from intangible assets, and Nevada does not have a corporate income tax at all. The Center on Budget and Policy Priorities (CBPP) notes in an April 2002 report that the Delaware PIC [passive investment company] of Toys R Us received $55 million in royalty and other passive income in 1990 by charging the company s stores for the use of the Toys R Us name, trademarks, and merchandising skills. 1 Paying royalties to this dummy corporation is then deductible in states with the Geoffrey Loophole, such as Missouri, so the business reduces the amount profit that the state can tax. MCEF tests these myths about the Geoffrey Loophole by examining two examples, Toys R Us and Acme Brick. The five myths include: If the Geoffrey loophole is closed, businesses will leave the state of Missouri. If the Geoffrey loophole is closed, Missouri workers will lose jobs because the businesses will leave. If the Geoffrey Loophole is closed, the Missouri consumer will pay more for the product. If corporations pay more in taxes by closing the Geoffrey Loophole, it will hurt their bottom lines and they will reduce their investment in the state. Only Democrats want to close the Geoffrey Loophole.

3 Myth #1: If the Geoffrey Loophole is closed, businesses will leave the state of Missouri. Republican Representative Shannon Cooper, Chair of the Missouri House Tax Policy Committee, told the Saint Louis Post-Dispatch he opposed ending the [Geoffrey Loophole] tax shelter because that could drive more businesses out of the state. He declined to identify businesses that might leave. 2 Reality: Toys R Us has stores in all 23 states that have closed the Geoffrey Loophole. Out of the 50 states, 23 have already closed the Geoffrey Loophole. Chart 1 shows those states where the loophole was closed. Toys R Us operates in all of these states with approximately 551 stores in the following divisions: Toys R Us, Kids R Us, and Babies R Us. The list of Toys R Us, Inc. stores was found by searching yellowpages.msn.com during the week of March 31, Chart 1: Toys R Us, Inc. Stores in States that Closed the Geoffrey Loophole Toys R Us Kids R Us Babies R Us Total Stores Alabama Alaska Arizona California Colorado Connecticut Hawaii Idaho Illinois Kansas Maine Massachusetts Minnesota Mississippi Montana Nebraska New Hampshire New Jersey North Carolina North Dakota Ohio Oregon Utah Total Stores

4 Myth #2: If the Geoffrey Loophole is closed, Missouri citizens will lose jobs because the businesses will leave. Reality: While out-of-state companies that utilize the Geoffrey Loophole avoid paying taxes, Missouri employers are being forced to close. In a Missouri Supreme Court opinion in November 2002, Acme Brick Company, based in Texas, was found to have established related companies in Delaware that allowed Acme to avoid paying taxes on its brick sales at its Missouri locations. 3 At the same time, two brick plants in Mexico, Missouri, have closed since 2002, causing about 300 people to lose their jobs. 4 Companies that use the loophole benefit while Missourians lose jobs. Myth #3: If the Geoffrey Loophole is closed, the Missouri consumer will pay more for the product. Reality: The Missouri consumer pays the same price for a toy at Toys R Us as the consumer in a state that has closed the loophole. Closing the Geoffrey Loophole will not affect the Missouri consumer who shops at Toys R Us, Inc. Chart 2 shows that the Missouri consumer pays the same price for a Hot Wheels 5 Car Gift Pack as a consumer in other states where the loophole has been closed. During the week of March 31, 2003, we compared Missouri to five Toys R Us stores that closed the corporate tax loophole and found that the consumer pays the same price for a Hot Wheels 5 Car Gift Pack regardless of the state. According to toysrus.com, Geoffrey the Giraffe s favorite pick is Hot Wheels Gift Packs. Chart 2: Price of Hot Wheels Gift Pack Compared Store s Phone Number Hot Wheels 5 Car Gift Pack Colorado $4.99 Idaho $4.99 Kansas $4.99 Massachusetts $4.99 Mississippi $4.99 Loophole State Missouri $4.99

5 Myth #4: If corporations pay more in taxes by closing the Geoffrey Loophole, it will hurt their bottom lines and they will reduce their investment in the state. Reality: The CEO, not the state, benefits when companies use the Geoffrey Loophole. Not paying taxes in Missouri has not increased investment in Missouri. The extra money the company saves by evading taxes can be found in the pocket of the CEO. In 2001 John Eyler, Chairman President and CEO of Toys R Us Inc., made $11,950,103 in total compensation including stock option grants. He also had an additional $9,107,500 in unexercised stock options from previous years. 5 The CEO is getting rich off of Missouri taxpayers while Missouri s budget is losing vital tax revenue. Myth #5: Only Democrats want to close the Geoffrey Loophole. Reality: Republicans in other states support closing this corporate tax loophole. Missouri Republicans give the impression that only Governor Bob Holden and the state s Democrats want to close the Geoffrey Loophole. In fact, two Republican governors have passed 2003 legislation that closed this loophole in their states: Ohio Governor Bob Taft and Massachusetts Governor Mitt Romney. 6 Missouri Republicans are simply trying to play politics against the Democratic governor in order to position themselves for the 2004 election. Missouri Citizen Education Fund is a nonpartisan research and education organization founded in 1992 to educate Missouri citizens on the mechanics of the state government. 1 Mazerov, Michael. (April 9, 2002, revised April 1, 2003). Closing Three Common Corporate Income Tax Loopholes Could Raise Additional Revenue for Many States. Center on Budget and Policy Priorities. See also: Geoffrey, Inc. v. South Carolina Tax Commission, State of South Carolina Supreme Court, Opinion No , July 6, Bill aims to boost state tax collections by Virginia Young. St. Louis Post-Dispatch, March 11, See ACME Royalty Company and Brick Investment Company, Appellants, v. Director of Revenue, Respondent. (Consolidated with) Gore Enterprise Holdings, Inc., Appellant, v. Director of Revenue, Respondent. Supreme Court of Missouri, Case Number SC84225 and SC84226, November 26, See St. Louis Post-Dispatch articles Mexico, Mo., plant closing could cost jobs (Associated Press) on February 6, 2002, and French wiremaker will shut Mexico, Mo., plants, eliminating 163 jobs (Gregory Cancelada) on January 4, AFL-CIO Executive Paywatch Database, Retrieved on April 5, 2003, from 6 See: Mazerov, Michael. (April 9, 2002, revised April 1, 2003). Closing Three Common Corporate Income Tax Loopholes Could Raise Additional Revenue for Many States. Center on Budget and Policy Priorities.