By Michael Mazerov

Just as Toys “R” Us has planned a comeback from bankruptcy, its longtime mascot Geoffrey the Giraffe has been playing a role in New Jersey’s budget negotiations. The company’s once-infamous tax dodging scheme involving its cuddly mascot may get a second life, as state lawmakers prepare to reopen huge tax loopholes to benefit large multinational corporations.

Despite wisely closing these loopholes years ago, the New Jersey Legislature is fast-tracking a corporate tax overhaul bill (S3737/A-5323) to give big businesses free rein to shift profits earned in New Jersey to tax havens overseas, beyond the reach of the state.

The product of months of closed-door negotiations between the Murphy administration and business interests, this bill is a bad deal for New Jersey. Lawmakers should remove the loophole provisions or, barring that, reject the bill entirely.

So where does Geoffrey come into play?

His role is part of big corporations’ decades-long scheme to use accounting techniques to keep from paying their fair share of profits tax to states where they do business; they do this by shifting profits to lower-tax states and eventually foreign tax havens.

The most well-known type of such a scheme was the “trademark holding company.” Its most famous exploiter was Toys “R” Us, which transferred its Geoffrey the Giraffe trademark to a subsidiary in Delaware. It then siphoned profits out of all its stores by having the subsidiary charge all Toys “R” Us stores tax-deductible royalties to display the trademarks. Because Delaware didn’t tax the royalty income of the subsidiary, the scheme reduced the overall state income tax liability of the Toys “R” Us corporate group, and left states like New Jersey unable to tax its stores’ profits.

New Jersey fought back against this scheme — first by passing a law in 2002 to restrict corporations’ ability to deduct these types of royalty and interest payments, and then again in 2018 by joining a majority of states in combining all stateside business profits to tax together, preventing companies from shifting profits from one state to the other.

Unfortunately, just like Geoffrey himself, tax avoidance has gone global. Big multinational corporations like Amazon and Starbucks can use almost identical strategies to shift profits to subsidiaries located in foreign tax havens such as the Cayman Islands and Bermuda, and study after study shows that corporations are doing so.

Just last month, a report by U.S. Senate Finance Committee staff found five large U.S. drug companies claimed that most of their profits were earned overseas even though most of their sales were to U.S. patients.

In recent years, lawmakers have worked to close some of the loopholes that allow corporations to shift their profits and avoid paying their fair share of taxes to the states where they do business.

One provision that helped claw back some of this foreign tax flight is called GILTI (“Global Intangible Low-Taxed Income.”) In the face of substantial tax base erosion, GILTI was implemented by an extremely business-friendly, Republican-controlled Congress during the Trump administration. The new rule is to ensure that large multinationals pay a minimum tax on certain foreign income and recapture some of the lost revenue.

New Jersey’s tax code automatically adopted GILTI when the 2017 federal tax law was enacted, and, up to now, state lawmakers wisely resisted corporate pressure to scrap this anti-abuse provision. Twenty states now include GILTI in their measure of taxable corporate profits, including 10 that fully conform with the federal law, and Minnesota lawmakers just passed legislation to do the same.

Unfathomably, the pending corporate tax overhaul bill would repeal New Jersey’s taxation of GILTI, and lawmakers would give up an important tool that federal policymakers gave states to combat tax dodging. It will also give up an opportunity to level the playing field for small businesses that can’t shift profits to Bermuda or Luxembourg. The bill would also repeal the 2002 law that restricted the ability of companies to deduct royalty and interest payments to their foreign subsidiaries, which is an important backstop to taxing GILTI.

The combination of these two reopened corporate tax loopholes will reward big corporations even further for siphoning their profits earned from New Jersey residents and stashing them in offshore tax havens.

This is not only bad policy, but also bad politics; letting wealthy corporations get away with not paying their fair share in taxes is broadly unpopular with the public.

Taking the long view, states have been fighting and losing a decades-long tug-of-war with the world’s largest corporations as they stash profits abroad.

Geoffrey the Giraffe may be on the comeback tour, but New Jersey should keep these two tax loopholes in mothballs.

Michael Mazerov is a senior fellow at the Center on Budget and Policy Priorities in Washington, D.C.

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