The tax-hike proposals by Democrats in the Legislature seek the most money from businesses that use overseas tax havens.
If they become law, Minnesota will be the first state to reach beyond the "water's edge" limits that have confined tax collection since the 1980s.
The idea sounds easy.
"In the end I think it's pretty straightforward," Sen. Scott Dibble, a Minneapolis Democrat who sits on the Senate Tax Committee, said after I told him how confusing I found the proposal to be.
But executing it will be difficult and perhaps expensive. It could subject the state to litigation that may take years to resolve. That may put the expected two-year tax collection of around $600 million in limbo.
"A large number of multinational companies shift their profits artificially to offshore companies," Dibble said. "They create a shell company in another country and attribute the licensing or other aspects of their business to that company. So when sales are made in Minnesota, the buyer technically is buying from that shell company and the corresponding profit is assigned overseas. So it is not taxed in Minnesota."
To stop this, Democrats propose that companies that sell in Minnesota be taxed not just on their U.S.-based operations but also on those that are based in other countries.
To tax specialists, this is called mandatory worldwide combined reporting, meaning that companies will have to combine their global profits when they file taxes in Minnesota. By doing so, that should reveal the money they make in Minnesota and subject it more clearly to tax here.
If it works, it will be another audacious change in a legislative session that's turned out to be hugely consequential for businesses.
It's unclear how many Minnesota-based companies shelter the sales they have in the state by assigning the revenue to a subsidiary or affiliate outside the country.
But even to companies that don't, it will raise the complexity of tax filing, particularly if they do a lot of business overseas.
"You have to wonder if Minnesota remains open for business," said Tod Carpenter, chief executive at Donaldson Co., the Bloomington-based maker of industrial filters that gets most of its revenue overseas.
Donaldson estimates the change would cost it less than $1 million annually. The company doesn't shelter its Minnesota sales in other countries, Carpenter said.
This idea has surfaced in the Legislature each year since it tried to conform with the federal government tax law passed in late 2017. That's when the Republican-led Congress and Donald Trump administration tried to discourage tax havens and corporate inversions — such as Medtronic's move of its headquarters to Ireland via an acquisition in 2015.
The 2017 law lowered the federal corporate tax rate and set up tax holidays to encourage U.S. companies to repatriate earnings attributed to overseas business units.
Those moves allowed companies a cheap way to bring in profits, boosting payouts to investors and executives. But it didn't much change business investment and production capacity in the U.S.
Dibble said he doesn't blame companies for doing what's "legal and logical" to make money. "They're doing exactly what corporations do," he said.
But he added that, with large companies using tax havens to lower their taxes in the U.S., small and midsize companies shouldered an unfair share of corporate taxes.
"That's been a public policy choice that we've made," Dibble said. "Now, we're making a different public policy choice."
An attorney from the Washington-based Council on State Taxation, which opposes the worldwide combined reporting, said at Senate tax hearing last week that the U.K. and Japan objected in the 1980s when California tried to impose it on businesses.
That led the Ronald Reagan administration to forge an agreement among dozens of countries to stick to "water's edge" taxation boundaries. But no international treaties bind the policies of states or other "subnational" tax entities.
The Senate debated the bill Tuesday, but much of the discussion focused on cutting income tax on Social Security earnings. The final shape of the tax bill will be hammered out in a conference committee in coming days.
At a moment when anti-corporate populism is fairly high, legislators face little political risk by raising taxes on companies that shelter their Minnesota income overseas.
The only risk is that big Minnesota-based multinational companies may feel like they are being singled out — and chased out. When I asked Dibble about that, he said: "That doesn't make any sense." Most Minnesota-based companies don't shelter their local sales by assigning them to an overseas affiliate, he said. And whether a company that relies on overseas shelters is based in Minnesota or not, if they are still making money selling things in the state, why would they stop?
"Last time I checked, companies like profits," Dibble said. "They're not going to pull up their stakes and stop selling in Minnesota."