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Dodging Taxes or Smart Business?
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Dodging Taxes or Smart Business?

I think one phrase sums up the Medtronic situation best: bad tax, good acquisition, great company.

I finally figured out a way to save a boatload on my taxes, thanks to accountants I came to know through a friend of mine in Golden Valley who did something similar about two years ago.

First, I bought a tiny, cheap houseboat off Latsch Island in Winona and established it as my primary residence and mailing address. Then, behind my house, I built a small “church” (one of those larger sheds Menards sells, with some refinements including a steeple, pulpit, pews, etc.); only fits 10 people, but it still qualifies as a church. Meanwhile, what was my primary residence is now described as a “church-related guest lodging and retreat facility.” I also parceled off my backyard woods as a cemetery, though it won’t probably be used as such for decades. The result: I’m still living in my house as a “caretaker,” but I don’t have to pay any property taxes.

My neighbors found out, and, well, some of them aren’t too happy. If they have to pay property taxes, I should too, they say. But I look at this as a fiduciary duty to my family and good for the community: More money in my pocket means more money I might eventually give to my kids and certain community causes—after I buy all the things I want first.

Hopefully by now you’re realizing this is fiction—though Article X, Section 1, of the Minnesota Constitution designates church properties as exempt from property taxes, and it used to be that some people did buy houseboats on the river to avoid paying property taxes. I couldn’t resist. It’s just . . . well, if Medtronic can do it, can’t I find a way to skirt taxes, too?

I heard a lot of comments like the above after Medtronic announced in June that as part of buying medical-device maker Covidien for $43 billion, it would move its corporate headquarters to Ireland to save on taxes it otherwise would have to pay to bring foreign-generated cash back to the United States. The related news created a great backdrop for the batting back and forth of what it means to be a good corporate citizen. Besides some good articles and opinion pieces that appeared in the Star Tribune, Twin Cities Business discussed the issue on KARE-11 on June 16, and several times on WCCO Radio, including in a “Fair Fight” on John William’s afternoon drive-time show July 1 (cbsloc.al/1ooY3Jr).

In prepping for “Fair Fight,” I thought of a phrase to keep me on track. Looking back, I still think it sums things up best: bad tax, good acquisition, great company.

  • At issue is the U.S. corporate tax rate of 35 percent, which also applies to income earned outside the United States and brought back into this country. Every other country in the G-8, and 26 of 34 member countries of the Organization for Economic Cooperation and Development, have switched to a territorial tax system, where they only tax income earned within their borders. As a result, more than 20 U.S. corporations have done what Medtronic is doing, and many more are gearing up to do so as well. Far more, however, are opting to leave their cash overseas and expand there instead of here. On the flip side, the tax makes it more attractive for foreign companies to buy those here, move their headquarters overseas, and realize an instant savings because they no longer have to pay this one tax. And don’t forget that most nations we compete with have reduced corporate tax rates over the past 20 years while we have not.
  • The acquisition adds 50 percent more customers, bringing to 15 million the number of people Medtronic will serve each year. It increases Medtronic’s headcount to 87,000, including an additional 1,000 in Minnesota. Combined, the two companies’ research and development budgets will be $2 billion a year, which can be spent on developing additional medical breakthroughs. And the company’s stock is rising.
  • In terms of being a good company, here’s how those 8,000 good-paying jobs (with solid benefits in a healthy working environment) help Minnesota’s economy (in part). Based on industry averages and public data, I’m estimating Medtronic’s Minnesota employees pay about $38 million a year in state income taxes; the company provides roughly $84 million in health care benefits to those employees; and it pays about $42 million toward their FICA taxes (the employer portion of Medicare and Social Security funding). That’s $164 million a year—before corporate, property and other taxes, as well as $450 million paid to 80 local vendors each year. Then there is the portion of Medtronic’s approximately $60 million a year in charitable giving that occurs within our borders.

Medtronic does a lot for our state and is hoping to do more by bringing back overseas dollars without losing nearly one-third of them. It’s smart tax policy.

And before one accuses another of tax dodging, it’s good to remember that Minnesota proudly markets a business that thrives on people skirting retail clothing taxes in their home states, and most of us buy things online—and in so doing, avoid paying taxes that would be due in brick-and-mortar stores.

The bottom line is that Congress needs to reform the tax in question to bring it more in line with our global competition. If you agree, give a shout-out to your elected officials and let them know. If you disagree, I’d appreciate hearing your point of view.

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