Can States Compromise Over Contentious Tax Issues? A Lesson From Abroad

December 1, 2021

By Scott D. Pattison, Deputy Executive Director of the Multistate Tax Commission, and former executive director of the National Governors Association. *

It’s a natural tendency to see the world through a lens that focuses exclusively on how things work within our own city or state borders. But there is a great deal to be learned, not just from neighboring entities, but from other countries.

With that in mind, I’d like to draw GFRC blog readers’ attention to an international tax negotiation process among 140 nations under the auspices of the Organization for Economic and Cooperation and Development (OECD).

The members of the OECD group recently came out with an agreed-upon framework for tax allocation changes and a minimum corporate income tax. The framework called the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy contains two “pillars.”  The first seeks to have taxes for multi-national companies based on where profits are earned and where economic activity actually takes place, regardless of where the corporation has a physical presence.

The second part seeks a minimum global tax of 15%. The argument for a minimum tax is to attempt to prevent some companies from avoiding taxes by finding a “tax haven” where taxes are nonexistent or very low.

Impressively, all but 4 of the 140 countries negotiating approved of the statement outlining the proposed changes. The negotiation process shows that even in the context of nations and taxes, parties very far apart -- and with significant varied interests -- can compromise and come to an agreement. This should provide the impetus for states and localities to consider the value of talking about coming together over significant issues. States and localities are going to be facing a multitude of policy issues in the future that may involve negotiated compacts or agreements. If, for example, smuggling of marijuana becomes a big problem because some states tax it much more heavily than others, perhaps some range of taxation could be agreed upon.

The OECD process involved a classic process in which the organization oversaw lengthy negotiations in which the nations identified their mutual goals, such as preventing widely varying tax rates all over the world that causes confusion and tax avoidance. They then identified areas of disagreement and began the long discussion of how to compromise and come to a mutual agreement over those tough issues.

For example, while many countries would like to have had the agreement cover most companies, the scope was narrowed to begin with including taxation that only affects about 100 large multi-national companies. This would provide time to evaluate and decide if the terms of the agreement should extend to more companies at a later date.

This compromise led to agreement on this issue. Also, concessions were made during the negotiations when certain countries indicated how critically important certain issues were to them. These countries could not ultimately agree to the final framework without compromises. For example, developed nations agreed to allow developing countries to start taxing at a lower amount than the developed nations. This compromise allowed many countries to approve the final framework in the end.

In the U.S. there are and will be disagreement as to the substance of any final international agreement and whether it will be implemented here. However, the process that led to the preliminary agreement is an excellent great example for state and local government to consider negotiating on even the toughest issues. Two areas that might be ripe for negotiations include the economic development arena and government purchasing. States and localities have long lamented the “race to the bottom” incentives of offering more and more tax breaks and concessions to companies to get them to locate in their state or locality. Perhaps there are some parameters that could be agreed upon. With government purchasing, states and localities can come together and agree to purchase in bulk and at certain prices to lower the costs of the goods and services they buy.

Another reason to be watching these international negotiations regarding tax policy is that any tax changes ultimately may impact state and local taxation decision-making. For example, a number of states have considered proposals to tax digital advertising. Maryland recently passed a law to do just that, the first state to do so. Depending on what occurs with the international negotiations, these taxes may be prohibited by the federal government. Even if an international agreement does not directly prevent or impact a state or local tax, decisions about taxation and tax rates are certainly influenced by what total taxes exist for a company.

Whatever the ultimate ramifications of the OECD negotiations for states and localities in this country, the negotiation process in this international arena has so far demonstrated that agreement is possible even with particularly thorny issues. Many state and local officials may understandably be reluctant to give up anything, But that was the case with many countries during these OECD negotiations -- and yet negotiations have so far been successful. If nations can do it, can’t state and local governments?

*The opinions in the blog post are exclusively those of the author and not those of his employer or any entity with which he is affiliated.