State governments already in financial trouble are losing billions of dollars in business taxes nationwide because the money is hidden in corporate tax shelters, according to a new report released Tuesday.

The report states that reincorporating in havens like Bermuda to avoid income taxes was one of the most prevalent means of tax-sheltering.

Somewhere between $8.3 billion and $12.4 billion in corporate income taxes were diverted from state governments in 2001 by a number of tactics, according to the Multistate Tax Commission, an organisation of state governments.

"Tax sheltering by some corporations is unfair to the vast majority of taxpayers, ordinary citizens and what we call tax-prudent companies," said Bruce Johnson, Utah's tax commissioner.

"The dollars are dramatically dwarfing what we've seen in past years."

The report estimated that roughly 30 percent of what states should collect overall in corporate taxes was going unpaid. California led the nation in estimated losses at $1.3 billion, followed by Illinois, Texas and Pennsylvania.

Losses in West Virginia, Ohio and Florida equalled nearly or more than 50 percent of the total corporate income tax revenues.

The report, introduced by Johnson and tax officials from California and South Carolina, said the most prevalent tax-sheltering manoeuvres included:

Creating separate corporations to house "intangibles" like trademarks, thus siphoning away taxes from states where companies actually do business.

Reincorporating in tax havens like Bermuda strictly to avoid income taxes.

Shifting taxable income overseas through transactions between jointly owned companies.

"Abusive tax shelters threaten the integrity of the system," said California state Controller Steve Westly. "And frankly, they're a slap in the face of every taxpayer who follows the rules."

The commission said the vast majority of businesses did not use such shelters, though the numbers are increasing.

Some tax-avoiding tactics are illegal, while others may only exploit loopholes in the law, the officials said. They said they hoped the report would encourage legislators to close those loopholes, and for companies to abide by the law.

Westly warned that regulators would be pursuing those that crossed the line. "We're going to clamp down on tax cheats," he said. "If you're even thinking of defrauding the system, California is the wrong state to do it."

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On the Net:

The report: http://www.mtc.gov/TaxShelterRpt.pdf