Rubbing the Magic Lamp of Foreign Earnings

State fiscal stability needs more than wishes

Yesterday, the Minnesota Tax Court ruled that the Department of Revenue overvalued Enbridge’s pipeline system by billions of dollars over several years; raising the prospect that 13 Minnesota counties could be on the hook for providing up to $55 million of property tax refunds.  Unlike most types of property, flight property, railroad operating property, and utility and pipeline operating property are assessed by the state rather than local assessors.  But since property taxes (generally) fund local governments, they are the ones positioned to pay the price for the state’s over-aggressiveness in its assessment practices.  If ever there was a case for emergency aid as a result of state decisions, this would be it.

It’s quite ironic, but timely, that this court ruling came on the same day as the governor’s pledge to veto the tax bill in part because of legislators’ reluctance to grab as much cash as possible from multinational corporations through conforming to international provisions of the Tax Cuts and Jobs Act.  Experts agree that the TCJA’s foreign source income provisions are by far its most complicated and unsettled aspects, and states that conform to these uncertain provisions raise those complications to another power.  The ramifications of this act will put tax attorneys’ kids through college for years to come.  And it raises the potential for “unfortunate surprises” down the road similar to the Enbridge case with respect to refunding any windfalls the state collects.

Renowned tax scholar Walter Hellerstein has observed that in addition to complex statutory issues “there are at least (emphasis ours) three significant constitutional issues” state conformity to both the TCJA’s repatriated income provisions and taxation of “global intangible low taxed income” (GILTI) potentially raise: 1) whether the income is constitutionally apportionable; 2) assuming it is, whether the state’s apportionment of that income is constitutionally fair; and, 3) whether the state’s taxation of that income discriminated against foreign commerce.  While the “foreign derived intangible income” (FDII) provisions do not appear to raise major constitutional issues, taxing such income raises its own administrative complications.

Even the business base broadening items the legislature and Governor Dayton agree on are a reservoir of potential implementation complexities.  As just one example, all parties have signed off on the limitation of business interest expense but that will almost certainly trigger the need for Revenue to draft rules and revenue notices addressing a myriad of unique circumstances based on apportionment and filing group issues.  That calls into question the reliability of the estimated $214 million the state expects to receive in FY 20-21.

Such real world complexity has a tough time competing with bumper sticker sloganeering simplicity.  Prudent, fiscally responsible action would be to take a big deep breath and pursue more thoughtful and fiscally reliable conformity tweaks over time as some of these abundant constitutional, legal, and administrative rulemaking issues settle themselves out.  Marching full speed ahead and banking on hundreds of millions of inevitably litigious, volatile – and in many cases one-time – revenues to pay for other permanent spending and individual tax relief jeopardizes the very fiscal stability the governor argues is so important.  $55 million is nothing to compared to the potential cost of legislative overreach in this area.