By Reuven S. Avi-Yonah, David Gamage and Darien Shanske, Special to CalMatters

Reuven S. Avi-Yonah is the Irwin I. Cohn Professor of Law at the University of Michigan, aviyonah@umich.edu.  David Gamage is a professor at Indiana University, Bloomington, dgamage@indiana.edu. Darien Shanske is a professor of law at the University of California, Davis, dshanske@ucdavis.edu.  They are participants in Project SAFE. They wrote this commentary for CalMatters.

Given the precipitous drop in economic activity caused by the coronavirus pandemic, as well as the increase in demands on state resources, California now finds itself in a budget crisis, despite having built up a $20 billion reserve.

The governor is projecting a deficit of more than $54 billion. Instead of balancing the budget with massive cuts, California could pick up much needed revenue by taxing the windfall given to the most profitable corporations by the 2017 federal tax cuts.

It is plainly appropriate that the federal government, which can borrow at extremely low rates, come to the aid of the states.  Unfortunately, it appears that the federal government is not planning to do nearly enough to help state and local governments weather their looming budget deficits caused by the pandemic.

State and local governments should not balance their budgets with cuts to essential services when they are most needed. It would be better for state governments to raise taxes on those who are in the best position to pay, rather than cut essential services and thereby worsen unemployment and the economic crises. 

Even better would be for state governments to tap into revenues by taxing U.S. corporations that benefited from the tax law passed by a Republican Congress and President Donald Trump in 2017.  The addition of one such tax could raise between $5 billion and $10 billion dollars.  There are many, many more such multibillion-dollar ideas out there.

Here we will focus on the $5 billion to $10 billion.  Under the tax regime prior to 2018, U.S.-based multinationals deployed a number of well-known techniques to avoid being taxed on domestic profits by U.S. tax agencies, either federal or state. Those profits were then secreted abroad to escape tax. How much money was stashed in this way?  About $2 trillion.  Again, much of that money represented profits on sales to U.S. residents and/or profits from the sale of intellectual property developed in the United States. 

The 2017 tax law passed by a Republican Congress and signed by Trump exempted most of this revenue from the federal corporate tax.  And, for technical reasons, under the recently passed CARES Act, what little tax corporations did pay on this $2 trillion will be returned.

But all is not lost. States can still tax this deemed repatriation. And they can use the money to keep the lights on during the current recession.  California’s corporate tax law, like that of most states, does not reach the repatriation (for the most part); this can be changed.  Alternatively, and even better, California should subject the repatriation to a special one-time tax surcharge.

There are many reasons why taxing the repatriation is a particularly good way for state governments to raise desperately needed revenue. Consider four.

First, California would be recouping a national loss. The repatriated profits of multinational firms reflect a form of national savings that is now being squandered. While these profits went untaxed for years and years, other taxpayers picked up the slack and critical national initiatives went unfunded. Now, as the money returns home, its value to the rest of us has been gutted by low tax rates and the predictable use of the repatriated revenues for corporate stock repurchases rather than job creation. 

Second, much of the untaxed profits squirreled abroad also escaped state-level taxes. Thus, for states, taxing these repatriated profits reflects satisfaction of an overdue tax bill avoided for years. 

Third, though we cannot offer precise revenue estimates, our $5 billion to $10 billion back of the envelope guesstimate could well be in the ballpark.  This makes sense because even a small slice of $2 trillion is a large number.

Fourth, since the profits have been earned, taxing them does not affect the corporations’ behavior or their competitive position.

In the end, California, like all states, will have to make very hard fiscal choices in response to the pandemic, but taxing the repatriation should be a no-brainer.

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Reuven S. Avi-Yonah is the Irwin I. Cohn Professor of Law at the University of Michigan, aviyonah@umich.edu.  David Gamage is a professor at Indiana University, Bloomington, dgamage@indiana.edu. Darien Shanske is a professor of law at the University of California, Davis, dshanske@ucdavis.edu.  They are participants in Project SAFE. They wrote this commentary for CalMatters.