Florida is letting a few global firms avoid millions of dollars a year in taxes on profits that have been shifted overseas

Gov. Ron DeSantis and state lawmakers gave a tax break to a small group of multinational giants — even though they had no idea how much that tax break would cost the state.

Photo credit: Roger W.

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A few years ago, Gov. Ron DeSantis and state lawmakers quietly approved a new tax break.

Florida’s Republican governor and GOP-controlled Legislature pass lots of tax breaks every year, of course. But this one was unusual for a couple of reasons.

First, this was a tax break for a very small circle of taxpayers: Multinational corporations that have lots of profits stuffed into overseas subsidiaries.

And second, DeSantis and lawmakers approved this tax break even though they had absolutely no idea how much it would ultimately cost the state — although their own staffs warned them that it would probably cost a lot.

Most people haven’t heard of this tax break before. That’s partly because DeSantis and lawmakers took steps to hide it from public scrutiny.

The Florida House of Representatives passed it 16 minutes before midnight on a Thursday night near the end of the 2019 legislative session. The Florida Senate approved it a few days later without a single word of debate. And the governor signed it into law on a Friday evening, on the weekend before the Fourth of July holiday.

This was a permanent tax cut, too. Which means it is saving more money every year for the few multinational firms that benefit from it — a group of global giants ranging from Microsoft to McDonald’s.

We still don’t know how much it costs. One preliminary estimate put the price tag at $105 million a year. That’s more than Florida spends on cancer research and care.

But this tax break doesn’t just help a few international behemoths. It also hurts the small and midsized companies that try to compete with them, said Darien Shanske, a law professor at the University of California, Davis, and a national expert on state tax policy.

“You’re essentially giving a discount on your corporate tax to big multinationals with the resources to shift income,” Shanske said. “Your corporations that can’t shift money abroad — because they’re smaller, they don’t have the intellectual property, etcetera — they’re going to pay full freight.”

We’re going to unpack this tax break in more detail in just a second.

But first we’re going to talk about cake.

Tax breaks and birthday cakes

I want you to picture a cake. A big, round birthday cake.

This cake represents all the taxable profit that a global corporation reports on its U.S. tax return. (It’s a really big cake.)

When the federal government charges its corporate tax, it taxes the whole cake. But when a state like Florida charges a state corporate tax, it only taxes a slice of the cake. (This is because a state can only tax the portion of a company’s profit that was earned within that state.)

The federal government sets a bunch of rules that help determine how big the cake is. For instance, corporations can use various federal tax deductions to shrink the cake down.

And the federal government dramatically changed those rules in December 2017, when former President Donald Trump and the then-Republican-controlled Congress passed the “Tax Cuts and Jobs Act.” It was one of the largest federal corporate tax cuts in American history. But it was also more complicated than a straight tax cut.

That’s because the Tax Cuts and Jobs Act made a bunch of reforms that forced corporations to report more taxable profit on their tax returns. But then it slashed the federal tax rate nearly in half — from 35 percent to 21 percent.  

To go back to our metaphor: Trump and Congress made the cake bigger. But then they took a much smaller bite out of it.

But these changes also meant that corporations might also have to pay higher state taxes. After all, if the cake gets bigger, then each state’s slice gets bigger, too.

Corporations were still going to save an enormous amount of money overall. It’s just that the mix would change a bit — they would pay a little more state tax but a lot less federal tax.

Making the guilty pay GILTI

But after the Tax Cuts and Jobs Act passed, corporate lobbyists began swarming state Capitols all around the country, trying to pressure governors and Legislatures to, essentially, opt out of all those reforms that were leading to bigger cakes.

They targeted a few big provisions in particular — including a new anti-abuse measure that was designed to prevent global corporations from dodging American taxes by shifting their profits overseas.

This measure is known by a pretty apt acronym: GILTI.

GILTI stands for Global Intangible Low-Taxed Income, and the specifics of how it works are, as you’d probably expect, pretty complicated. But the general concept is really quite simple.

Basically, GILTI is a formula used to identify corporations that are packing suspiciously high profits into certain foreign subsidiaries. And it forces those corporations to add some of those profits back into the total taxable profit they report on their U.S. tax return.

So GILTI makes the cake bigger.

GILTI is by no means perfect. But it’s proven at least partly effective. An April 2021 report by Congress’ Joint Committee on Taxation found that 81 of the world’s largest corporations had to add a combined $102 billion in GILTI profits back into their U.S. tax returns in 2018.

Adding those GILTI profits back meant that those 81 corporations had to pay an extra $6.3 billion in federal income taxes.

Most people would probably agree that these corporations should have to pay state taxes on those GILTI profits, too — and they do in 20 states, plus the District of Columbia.

But not in Florida.

And that’s because of the tax break that Gov. Ron DeSantis and the Legislature approved back in 2019. That tax break essentially allows corporations to pull all their GILTI profits back out before they calculate their Florida taxes.

Again, we don’t know how much this tax break costs the state. But when economists at the Florida Department of Revenue studied it, they unofficially estimated that “decoupling” from GILTI would save corporations — but cost Florida — $105.5 million a year.

This tax break even let corporations go back and get refunds on any GILTI taxes they might have paid in 2018.

Florida’s self-imposed handcuffs

Why would DeSantis and lawmakers spend so much money on a tax break that only helps a few giant multinationals — and gives them even more of a competitive advantage over smaller firms that only do business in the United States?

Well, in the little public discussion they had on the bill (House Bill 7127), lawmakers claimed they had no other choice.

“There are constitutional bars to states taxing foreign income differently than domestic income,” former state Rep. Bryan Avila, a Republican from Miami Springs, said during an April 2019 committee hearing on the legislation.  “The upshot is that there is significant question about whether Florida could constitutionally tax GILTI income, even if we wanted to.”

Avila, who has since been elected to the Florida Senate, was repeating talking points used by executives and lobbyists at some of the world’s biggest corporations — companies like Anheuser-Busch InBev S.A., the Belgian-based multinational that makes Budweiser beer.

“A state tax on foreign income, like this one, is likely prohibited,” Victoria O’Connor, a senior tax counsel at Anheuser-Busch, said during an October 2018 discussion with the Florida Department of Revenue, as companies like InBev were lobbying to get Florida to ignore GILTI.

But the claim that states can’t constitutionally tax GILTI isn’t some settled fact of law.

It’s just a legal theory invoked by a bunch of corporations that are trying to pay as little tax as possible. (A legal theory that rests in large part on a very corporate-friendly reading of a 1992 Supreme Court decision involving macaroni-and-cheese giant Kraft).

It’s also a theory that still hasn’t been tested five years after the Tax Cuts and Jobs Act became law — even though, again, 20 states and D.C. are taxing GILTI.  

The very notion that GILTI profits are “foreign” profits is debatable. The entire purpose of GILTI is to identify income that a corporation actually earned in the United States but then shifted overseas.

Some corporation might still take a state to court over GILTI. Kathleen Quinn, a partner at McDermott Will & Emery, one of the nation’s top tax law firms, said it can be several years before a case surfaces in public. States are just now auditing post-Tax Cuts and Jobs Act tax years, she said, and it will take time to complete those audits and exhaust non-public, administrative appeals.

“There will be litigation on this issue,” Quinn said. “There are challenges coming.”

But they haven’t happened yet.

And in the meantime, Ron DeSantis and the Florida Legislature continue to let a handful of global giants avoid millions in state taxes every single year.