Washington State doesn't have a deficit, it just has a destructive array of tax breaks for wealthy corporations such as those highlighted by the Economic Opportunity Institute and Seattle Weekly's ongoing Candyland of Tax Breaks series. Amazingly though, the impact from Microsoft's lobbying and dodging of the state's Royalty Tax is enough on its own to make up the entirety of last year's draconian cuts and the current budget shortfall.
Until 2010, Washington State's Royalty Tax required Microsoft to pay about half a percent (.484) of its worldwide licensing revenue in taxes (cumulatively, about $180 billion since 1998). By recording its revenue through a small Reno, Nevada accounting office, the company claimed the revenue was not taxable (for deeper background, read our Overview and 2010 Fact Sheet). The company has never denied this activity and in fact has confirmed its Nevada tax practices in public statements.
Here's three ways to look at Microsoft's impact on the state's budget deficit:
1) $1.51 Billion in Tax Savings: Based on Microsoft's own reporting, I estimate the company has saved $1.51 billion in taxes, interest and penalties since 1998. For the first time, we've published our entire analysis in a Google Docs spreadsheet: Financial History of Microsoft's Nevada Tax Dodge.
This estimate includes the $104 million that Microsoft saved last year after Chair of the Finance Committee Ross Hunter, a former Microsoft Executive, led the Democratically controlled Legislature to drastically shrink the Royalty Tax from a tax on worldwide revenue to one based just on sales to Washington State customers. Hunter's action will continue to cost the state more than $100 million annually going forward. Hunter even slipped in a section to grant Microsoft amnesty from its past abuses.
2) $4.37 Billion in Tax Savings: The Royalty Tax rate actually was 1.5 percent (more than three times higher) prior to 1998, but was cut in response to software industry lobbying. Scenario B in the Financial History shows that if not for its lobbying to cut the Royalty Tax from 1.5 to .484 percent, Microsoft would owe $4.37 billion in taxes, interest and penalties.
3) $6.1 Billion in Tax Savings: A 2010 job listing at Microsoft's Nevada website (see background) claimed the sub-corporation records more than $30 billion in revenues annually. If accurate, this figure is about half the company's revenue and 40 percent greater than our earlier estimates. After re-calculating Microsoft's tax avoidance based on this figure (it stopped publicly reporting licensing revenues in 2004), we estimate Microsoft would owe $6.1 billion in taxes, interest and penalties - enough to fund all of the Legislature's 2010 cuts and the current shortfall.
In general, Microsoft's geographic accounting practices are so deceptive that the Institute of Tax and Economic Policies had to exclude the company from its recent Corporate Taxpayers and Tax Dodgers report:
"We [had] to leave out from the study companies whose geographic allocations were obviously ridiculous (e.g., almost all or even more than all of their pretax profits were reported as foreign, even though most of their revenues and assets were in the United States). Google and Microsoft are two examples of such apparently “liar companies” that we left out of the study. For such companies, it may be that they reported in their annual reports how they misallocated their profits on their tax returns, rather than where their profits were really earned."
It's time to question the frame that Governor Gregoire and the Legislature talk about the budget and education cuts. There is no budget deficit; we've just made a choice to give the region's most profitable company a huge pass on our Royalty Tax law. There is no budget deficit - only the money we've let Microsoft keep for itself through harmful insider lobbying and Nevada tax practices.
So in response to Governor Gregoire's and Microsoft's General Counsel Brad Smith's call for an increase in the already regressive sales tax to stabilize education funding, tell them where they can find the money: One Microsoft Way.