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Estimated Magnitude of Microsoft's Nevada Tax Dodge

Estimated Magnitude of Microsoft’s Nevada Tax Dodge

Is Microsoft the New Robin Hood?

Microsoft begins returning a fraction of its multi-billion dollar Nevada tax dodge.

In March, The Seattle Times noticed Microsoft’s General Counsel Brad Smith had “indicated some willingness for the company to pay more in state taxes” and last week, it led Northwest media coverage of the company’s voluntary agreement to begin paying an exclusive tax of about $28 million annually. It’s a big change of heart by Smith, CEO Satya Nadella and its 17-year ex-employee who runs much of the budgetary leadership in our legislature, Rep. Ross Hunter. A significant portion of this tax will pay to expand computer science degree programs that the company’s requested. Here’s what everyone glossed over.

Keeping Microsoft Happy

“Citizen Microsoft”

From 2004 to 2010, I reported on Microsoft’s Nevada tax dodge which grew dramatically from its beginnings in 1997 until Rep. Hunter led the redefinition of the state’s royalty tax fully legalizing the company’s activities and granting it amnesty. Conservative estimates of Microsoft’s tax dodge and lobbying successes between 1997 and 2014 show total savings grew to $210 million annually and a total of $2.74 billion. If you take out the company’s successful lobbying to cut the royalty tax rate by two-thirds in 1997 and apply its public statements about the 50 percent of worldwide revenue it records in Nevada, the total comes to $8.75 billion.

Coincidentally, there are unconfirmed reports that the state has raised the royalty tax rate back to 1.5 percent this year. If Hunter hadn’t rewritten the law for Microsoft in 2010, the company would be paying $650 million annually this year (a bit more than the voluntary $28 million).

You can read a historical summary of the company’s tax dodging at Crosscut, “Where are Washington’s K-12 dollars? Just ask Microsoft shareholders.” It includes background, financial summaries, charts and an audio interview I did with Smith in which he acknowledges the company’s Nevada tax practices.

Why Does This Matter?

Microsoft General Counsel Brad Smith

Microsoft Counsel Brad Smith

After the 2008 recession, the Legislature cut $4 billion from K-12 and higher education spending, in part to help absorb the costs of maintaining tax breaks for wealthy corporations such as Microsoft. This led to a 58.6 percent ($4,009) increase in tuition for state university students and led to the state supreme court holding the legislature in contempt, which remains unresolved. Ironically, Smith’s lobbying and Hunter’s leadership played a prime role in the legislative culture that drove these kind of policies which Hunter strangely told the Times is still “…one of the worst tax codes in America.”

And, education is only one of the huge set of problems the state and the cities of Seattle and Microsoft’s home base of Redmond face. Not only does Washington State maintain the most regressive tax system in the nation but it continues to go through a huge corporate boom while government function and key indicators of regional health are completely broken (I’ll be writing about this more in the next week.)

Cartoon by R.R. Anderson

Cartoon by R.R. Anderson

Certainly there’s a positive side to Rep. Hunter, Smith and Microsoft deciding to make voluntary tax payments, but this group has played a horrible role in the evolution of Washington State government and policy over the past twenty years. While Robin Hood stole from the rich and gave to the poor, Microsoft and its shareholders stole from all the residents in Washington State and are starting to give a tiny bit back now on the condition that it’s spent on things they want it to be spent on.

While Northwest media are applauding Microsoft’s voluntary tax payments, if Microsoft’s new CEO Nadella really wants to lead change, the company needs to redirect its lobbyists and the Association of Washington Business to push for the state tax system to be completely restructured to include deeper investments from our most profitable corporations and a progressive income tax on their higher paid employees.

A Message to CEO Nadella

Mr. Nadella: Microsoft’s Counsel Smith has led the manipulation of tax law in this state for nearly twenty years and severely damaged its budget and capacity for education, transportation, healthcare and more. Certainly he’s made Microsoft’s shareholders wealthier but most of them primarily reside outside Washington State. If you truly want to lead Microsoft and our state in a positive direction, you have to come out and lead strongly on tax reform which will provide resources for the state to sustainably fund the needs of all of its citizens; and it’s probably time for Smith to retire and for you to hire a policy leader that reflects more of your vision.

Read more about the history of Microsoft’s Nevada tax dodge including global media coverage and my page of resources. Follow me on Twitter @reifman. Contact me here as needed.

Posted by Jeff Reifman

Jeff is a technology consultant based in the Pacific Northwest.