As the year draws to a close, I wanted to provide an update for everyone who's followed the story of Microsoft's Nevada tax dodge this year:
- In October, Microsoft announced record profit of $16.2 billion. The company now has approximately $44 billion in cash and short term holdings on hand.
- We learned that the company records about half of its revenue at its Nevada licensing subsidiary - outside the reach of Washington's department of revenue.
- The Washington State Legislature, led by Democrat Representative Ross Hunter, essentially legalized Microsoft's Nevada tax dodge by redefining the state's royalty tax so that the majority of the company's worldwide sales were no longer taxable.
- Partly as a result of this, Washington State is now facing a $5.7 billion deficit, up from the earlier estimate of $3.3 billion. The governor is now threatening a cuts-only budget.
- Most people in Seattle (and Washington State), know nothing at all about Microsoft's Nevada tax practice in part due to the fact that The Seattle Times has never reported the story.
- Local coverage of this issue does not appear to be improving. e.g. The Gates Foundation gave $400,000 to local news blog Crosscut.com, which later was caught removing anti-Microsoft sentiment from a published editorial by the University of Washington's Bill and Melinda Gates Chair of the Computer Science and Engineering Department.
- Perhaps due to the lack of awareness of his actions, King County voters re-elected Rep. Ross Hunter. Diane Tebelius, Hunter's Republican opponent never mentioned the Microsoft tax dodge, though she was briefed on it (by me), presumably because she did not want to alienate Microsoft employees in her district.
- Statewide voters rejected an income tax on people earning more than $200,000 annually, an initiative laudably supported by the father of Microsoft Chairman Bill Gates, William Gates Sr.
- Shortly after the election (and the failure of the high earners initiative), Microsoft CEO Steve Ballmer announced planned sales of $1.3 billion in Microsoft stock. Ballmer gave $425,000 to help defeat the initiative.
- Statewide voters also chose to repeal the retail candy, soda and bottled water tax which Hunter helped pass ... in part to make up for the shortfall complicated by the royalty tax cut for Microsoft.
- The City of Seattle is one place where these tax cuts are going to have to be made up in other areas through cutbacks in services and increases in fees. e.g. $4/hr parking.
- And, state voters passed a controversial initiative to require a 2/3 supermajority to raise future taxes further complicating the task of an already conflicted legislature which has never had much skill balancing the burden of taxation between citizens and the state's wealthiest corporations.
- Last but not least, the Department of Revenue finally explained why they haven't challenged Microsoft's Nevada tax practice using appeals court precedents from Louisiana which set clear guidelines for state taxation on sales of intangible goods like software licenses. Most interestingly, the department concludes its explanation saying that after it asked the Legislature for stronger legislation to close these kinds of tax loopholes, the Legislature instead chose to essentially legalize Microsoft's royalty tax dodge by redefining the definition of the tax.
So, where does this leave us? Basically, in a lot of debt with a Legislature which thinks it's been directed by the voters not to raise taxes for anyone (it's possible they were just sending a message that they'd prefer the legislature make these decisions on its own).
Things are going to get harder for Washington State's most vulnerable citizens and costlier for nearly all its residents. Meanwhile, the global shareholders of wealthy companies like Microsoft will continue to get a subsidized ride on our state's declining infrastructure.
One idea to help balance the budget going forward would be for the Legislature to restore the Royalty Tax to its 1997 rate and strengthen the enforcement language, this would raise nearly $300 million annually just from Microsoft and likely another few hundred million from the state's other software makers.
Based on what I've seen and learned this year, it's clear that the issue of Microsoft's Nevada tax dodging is just one tiny part of a much bigger problem - that of corporations funding and influencing the state legislature to pursue policies that favor their shareholders, while leaving residents on the hook to pay higher and higher taxes. Over the next year, you'll probably see me focus more on this issue and less on Microsoft.