Corporate income tax study sure to intensify political deficit battle

REUTERS/Morteza Nikoubazl

Best Buy faced a federal income tax liability of 39.3 percent for the three-year period of 2008-10 — above the statutory rate of 35 percent — while Wells Fargo ended up paying nothing.

The disparity between two companies with a strong Minnesota presence is not unusual throughout the nation, a study released Thursday shows. (The chart below shows how 17 Minnesota-related companies fared on corporate income taxes for the three-year period.)

Another 29 of the nation’s largest and most profitable corporations also paid no federal income taxes over this stretch.

Those are among the findings of the study (PDF) — “Corporate Taxpayers and Corporate Tax Dodgers” — done by Citizens for Tax Justice and the Institute for Taxation and Economic Policy, left-leaning DC-based organizations that advocate for tax fairness. They have collaborated on similar studies for years, including research in the 1980s on corporate tax avoidance that helped pave the way for the historic 1986 tax overhaul.


Minnesota chart explanation

The official federal income tax rate is 35 percent of pretax profits, but a new analysis shows that many of the nation’s largest and most profitable corporations pay a far lower rate by taking advantage of a variety of subsidies and tax breaks.

Table shows the widely ranging rates paid by 15 companies based in Minnesota and two with significant interests in the state (Alliant Techsystems and Wells Fargo).

Effective federal income tax for MN corporations
Sources: Citizens for Tax Justice and Institute on Taxation and Economic Policy, MinnPost graphic

A number of corporations, including Wells Fargo, dispute the study’s conclusions and lash back at its presentation and methodology.

The issue of corporate tax breaks is a big one. It is squarely before the 12-member Congressional Supercommittee assigned to decide by Nov. 23 on how to reduce the nation’s long-term fiscal deficit. Ending some of these so-called “tax expenditures” could be a significant part of the solution, but the panel remains deadlocked over how to change the tax system.

Overall, the income generated by corporate income taxes has now fallen to barely more than 1 percent of the nation’s gross domestic product — its lowest level since 1983, the study found.

That was a few years before the sweeping tax overhaul, achieved in 1986 under President Ronald Reagan and Congress, eliminated a slew of corporate tax breaks and subsidies and helped boost the income from this tax to more than 2 percent of GDP for much of the time since 1986.

Not anymore.

Part of the problem is a familiar one: Typically, after a tax code gets cleaned up, it gradually reverts to where it was before the overhaul as interest groups win more exemptions and subsidies that end up shooting gaping new holes in the system. This process has gotten “out of control,” the study said.

Wells Fargo spokesperson Peggy Gunn released a statement explaining that the years cited by the study were unusual from a tax perspective because of the bank’s acquisition of North Carolina banking giant Wachovia on Dec. 31, 2008. The statement defended the bank’s tax practices, countered that the study “takes data out of context to advance an agenda,” and said, “Over the last 10 years Wells Fargo has paid more than $30 billion in income taxes to federal and state authorities and billions more in other taxes, and it fulfills all tax obligations.” Wells expects to pay “significant income taxes” for 2011, the statement said.

Area tax specialists comment
Twin Cities tax specialists — former Minneapolis Fed research chief Art Rolnick and Mark Haveman, executive director of the Minnesota Taxpayers Association — said the study points up various shortcomings of the federal corporate income tax.

The study covered 280 of the Fortune 500 corporations. The other 220 were eliminated either because they were unprofitable during one or more of the three years or because they didn’t disclose enough in their regulatory reports to determine domestic profits, current federal income taxes or both.

The statutory federal corporate income tax rate is 35 percent, but the analysis found that on average, the 280 corporations were able to reduce that rate to 18.5 percent — $250.8 billion in taxes on $1.35 trillion in pre-tax profits — over the three years.

In the report and in a conference call Thursday, Citizens for Tax Justice Director Robert McIntyre, a steeled veteran of such studies dating to the early 1980s, did not allege any illegalities. The study agreed with “corporate apologists” who “correctly point out that loopholes and tax breaks” that allow corporations to minimize or eliminate income taxes “are generally quite legal.”

It added that growing tax preferences “stem from laws passed by Congress and signed by various presidents. But that does not mean that low-tax corporations bear no responsibility for their low taxes. These laws were not enacted in vacuum; they were adopted in response to relentless corporate lobbying, threats and campaign support.”

The study challenged the claim generally made by corporate lobbies that U.S. corporations typically pay lower overall income tax rates abroad than in the U.S., and voiced skepticism about the oft-made argument that they must have lower corporate income taxes to compete globally.

It found that 87 of 134 U.S. companies with foreign pretax profits equal to at least 10 percent of their worldwide profits paid a lower U.S. rate and 47 a higher U.S. rate than their foreign rates.

Effective corporate income tax rates “are usually not a significant determinant of what companies do,” the report argued. “Instead, companies have shifted jobs overseas for a variety of non-tax reasons, such as low wages in some countries, a desire to serve growing foreign markets and the development of vastly cheaper costs for shipping goods from one country to another than used to be the case.”

Tax policy is also emerging as a major issue in the 2012 presidential campaign. The report likened the corporate income tax situation to the proposal by investment guru Warren Buffett that the wealthy individuals should pay higher taxes to help the country ease its fiscal woes.

But Rolnick, a longtime foe of corporate subsidies, said it’s more complicated than that. Many of the exemptions are warranted, he said, and there’s significant disagreement over which ones have merit and which ones ones don’t.

The country ought to clean up its tax code, he said, but one approach with the corporate income tax would be to broaden the base and lower the effective rates. He added that while many Americans believe that you tax the rich when you tax large corporations, the reality is that the corporations typically end up passing the corporate income tax on to others — shareholders, employees, customers.

He said a better way to make the tax code more progressive would be to tax consumption.

‘Cryptic disclosures’
The report called on large public corporations to be more transparent, instead of offering “often cryptic disclosures” in their annual reports of why federal income taxes are lower than the statutory 35 percent rate. It asked Congress to focus more on the long list of corporate tax breaks produced annually by the Joint Committee on Taxation and the U.S. Treasury, and urged lawmakers to turn around the trend to less corporate income taxation by curbing the tax breaks.

But Mark Haveman countered that the very premise of the corporate income tax is based on two now-flawed fundamentals — “source of income” and “corporate residence.”

His view: “These concepts don’t make much sense anymore in a modern economy — especially for multinational enterprises. Corporate profits can be sourced anywhere; corporate residence is wherever you want it to be. This is reality. The global genie is out of the bottle.

“The report is right — the federal corporate income tax is certainly a leaky and listing ship. For the sake of argument, let’s say we try to patch all these holes up and that (amazingly) we are successful. Now we have something that does a fantastic job of taxing capital. The problem is everyone else in the world is heading in the exact opposite direction — lessening the tax burden on that which is highly mobile (capital) and increasing the tax burden on that which is less mobile (consumption and, to lesser extent, labor,” he said.

The report identified Wells Fargo as the largest recipient of tax breaks in the entire study, with $18 billion in tax subsidies over the three-year period. Its effective rate for 2008-10 was -1.4 percent.

Wells Fargo hits back
Wells Fargo’ response: “During the years cited by the study, Wells Fargo’s results included significant losses as a consequence of its acquisition of Wachovia, which when realized reduced Wells Fargo’s taxable income. For financial reporting purposes, the losses were recognized at the date of acquisition through purchase accounting adjustments in accordance with generally accepted accounting principles. For example, we recorded losses in excess of $40 billion on purchased credit-impaired loans. Subsequent to acquisition, as those losses are realized for income tax purposes, they are reflected as a deduction on our tax return, which therefore reduced income subject to tax.”

“Over the last 10 years, we have paid more than $30 billion in income taxes to federal and state authorities (including Wachovia, which Wells Fargo acquired in 2008). In addition, Wells Fargo has paid billions over this same time frame in other taxes, including real estate, property and payroll taxes.

“Wells Fargo is a responsible corporate citizen and we believe we have fulfilled all tax obligations to federal, state and local communities where we serve our customers. Like other corporate and individual taxpayers, the amount of income taxes paid each year will vary based on the level of income subject to tax.

“This report takes data out of context to advance an agenda. A substantial portion of the Wachovia losses had been realized by the end of 2010, and based on results for the first three quarters of 2011, Wells Fargo expects to pay significant income taxes for 2011.”

Xcel Energy had the second-lowest effective tax rate for the Minnesota companies in the analysis: 1.0 percent. Asked why, the company provided this explanation from Jim Duevel, Xcel’s managing director of tax services:

“The referenced study reports that Xcel Energy had an average effective tax rate of 1.0 percent during the period 2008-10. To clarify, that average tax rate was our ‘current’ federal tax expense, and it ignored associated federal ‘deferred’ tax expense. Our actual overall federal effective income tax rate (as reflected in our audited financial statements) averaged about 31 percent.

“This clarification is important because, as the study itself notes, Xcel Energy’s low current federal tax expense was due largely to accelerated and bonus depreciation, which is a ‘timing’ difference, meaning it is not a permanent reduction in tax (like a tax credit). The tax benefit will reverse in the future. Thus Xcel Energy’s overall federal effective rate is a more accurate picture of its federal income tax expense.

“During 2008-10, Congress ramped up accelerated depreciation (termed ‘bonus depreciation’) and Xcel Energy made investment decisions in concert with regulators based on the needs of customers in the communities we serve. We took advantage of all available tax incentives, such as federal accelerated and bonus depreciation, which have been passed through to customers, thereby reducing the price of electricity and natural gas. It also should be noted that despite having reduced income tax payments in recent years, Xcel Energy still paid significant corporate taxes, including about $300 million annually in state and local property and sale taxes.”

Why some pay more
Best Buy ended up paying the second-highest rate in the study — 39.3 percent, or more than 4 percentage points higher than the 35 percent statutory rate — and St. Jude Medical also paid more (37.5 percent). A Best Buy spokesperson said the company does not comment publicly on its cash tax rates. St. Jude Medical didn’t return a call.

Matthew Gardner, executive director for the Institute on Taxation and Economic Policy, explained that both companies faced adverse turnarounds in taxes deferred from prior years — Best Buy for all three years of the study period, and St. Jude for one of the three years. In earlier years, they benefited from the deferrals, but that provision came back to bite them, he said.

The study’s authors said the tax code now includes more than 150 corporate subsidies. It identified accelerated depreciation provisions, stock option accounting, offshore tax sheltering and industry-specific tax breaks as major reasons for lower corporate income taxes. It singled out Wachovia’s “extensive schemes” to shelter its U.S. profits by “pretending to own and lease back municipal assets in Germany such as sewers and rail tracks, a practice heavily promoted by some accounting firms.” Other industry-specific breaks noted include tax preferences available to NASCAR racetrack builders, movie-makers, video game producers, ethanol manufacturers and companies that move operations offshore or don’t move them offshore.

Other points:

• Seventy-eight companies paid nothing or had negative tax rates in one or more years covered by the analysis — “often receiving outright tax rebate checks from the U.S. Treasury,” meaning they made more money after taxes than before.

• The biggest beneficiaries were industrial machinery companies, information technology services and utilities. Only two industries – health care and retail and wholesale trade — paid effective rates of 30 percent or more.

• Yet the rates varied widely within every industry for the three years. In chemicals: DuPont had a -3.4 percent rate while Monsanto paid a 22 percent rate. In retail: Macy’s paid a 12.1 percent rate; Nordstrom’s, 37.1 percent. In the computer industry: Hewlett-Packard paid at a 3.7 percent rate, Texas Instruments at 33.5 percent. Another comparison: Fed Ex had an 0.9 percent rate; United Parcel Service, 24.1 percent.

• In 1988, the effective rate in a comparable study was 26.5 percent, up from 14.1 percent in 1981-83 thanks to the Reagan era overhaul (which reduced the statutory rate to 34 percent from 46 percent). But by 1996-98, the effective rate was down to 21.7 percent and by 2002, corporate tax cuts had driven it down to 17.2 percent. It was 17.3 percent for 2009-10.

• In the last half of the 1990s, revenues from the corporate income tax paid for 11 percent of federal programs; in fiscal 2010, 6 percent.

The analysis argued that the losers from corporate tax avoidance are the general public, disadvantaged corporations, the U.S. economy, state governments and “the integrity of the tax system and public trust therein.”

State corporate income tax receipts are tied to the federal corporate tax returns. Thus the two organizations are planning to release state-by-state studies in December.

Dave Beal is a free-lance business journalist. He can be reached at dandcbeal[at]msn.com.

Comments (11)

  1. Submitted by Dennis Tester on 11/04/2011 - 12:06 pm.

    When you have to do a study to determine who actually pays what, it’s time for tax reform. Eliminate the subsidies and write-offs and make all companies large and small pay the same flat rate so it’s transparent.

  2. Submitted by Thomas Swift on 11/04/2011 - 12:12 pm.

    The report identified Wells Fargo as the largest recipient of tax breaks, but it failed to identify Warren Buffet, he of the “Tax me more!” spoof as a major shareholder.

    Heh, heh…leftists are so simple to lure into the barn.

  3. Submitted by Paul Scott on 11/04/2011 - 02:33 pm.

    Let’s not forget IBM, with its significant presence down here in Rochester: 8 billion in profits in 2010, with an effective tax rate of just over 2%

  4. Submitted by Bernice Vetsch on 11/04/2011 - 04:15 pm.

    Does Art Rolnick mean to say he favors a business consumption tax or does he favor the ugly so-called Fair Tax, by which the poor and middle classes would pay a 23% or higher tax on all their spending — housing, food, clothing, transportation (including car payments and gas), education, health and other insurance, visits with their doctors, and every other penny spent.

    For the poor this tax would be charged on their entire incomes; for the middle class on much or most of their entire gross incomes. And the retail industry as the nation’s tax collector would replace the IRS and social service programs like Medicare/Medicaid.

  5. Submitted by Richard Schulze on 11/04/2011 - 06:13 pm.

    I agree with Mr. Tester’s solution regarding tax expenditures (loopholes). Tax revenues can be increased substantially by limiting the deductions, credits and exclusions that are essentially government spending by another name.

    I’ve acquired investments, a home, and an insurance policy all for their own sake, but everyone of them was also sold with the promise of a reduction in taxes. As much as I enjoy the benefits, I really can’t justify why they should exist.

    Re: #2
    The US is actually a corporate tax haven, with the lowest effective corporate tax rates of almost all the countries that participate in the OECD. That’s a little fact that the GOP apparently doesn’t want the American public to understand, since all its hype is in terms of statutory rates and not in terms of effective tax rates.

  6. Submitted by Joseph Skar on 11/05/2011 - 07:17 am.

    #5 -tax haven are you joking? PWC disagrees with you see line one of, on bb link below.

    http://www.bloomberg.com/news/2011-04-14/u-s-companies-pay-world-s-sixth-highest-tax-rate-study-finds.html

  7. Submitted by Richard Schulze on 11/05/2011 - 03:53 pm.

    The effective tax rate, after deductions and tax breaks are taken into account ,is among the lowest in the OECD.

  8. Submitted by Joseph Skar on 11/05/2011 - 09:29 pm.

    Richard – What else would effective tax rate take into account? The deductions and credits are what make the rate effective and per PWC the US has the 6th highest effective rate in the world. If you didn’t look at the link the first sentence is “U.S. companies face the sixth- highest effective tax rate in the world, according to a study by PricewaterhouseCoopers LLP.”. PWC is a big four public accounting firm with thousands of tax professionals in nearly every country in the world so if any one knows effective rate by country it would be them. Unless you wanted better rates and service then you would ask KPMG Tax Minneapolis.

  9. Submitted by Richard Schulze on 11/06/2011 - 08:40 am.

    Joe, we both could continue cherry picking data but I’ll defer to your expertise. But allow me one more last dying gasp, I’ll see your Bloomberg and raise you one CBO report.

    The CBO study: http://tinyurl.com/aa7sa3 measured corporate taxes as a percentage of GDP; US taxes were the 2nd lowest of all the OECD members;

    As an aside, I would like to get your perspective on the FASB and mark to market. It seems the FASB came under intense lobbying from both the financial industry and Congress to allow for more “flexible” accounting standards for certain categories of financial assets. Do you feel this new standard helps to prevent the deleveraging of the market? These generous standards appear to allow financial institutions to “keep hope alive” for another day. Is there anything to this or is this just some more Ron Paul crap.?

  10. Submitted by Joseph Skar on 11/06/2011 - 12:06 pm.

    Richard – good question, mark to market disclosures under FAS 157 or ASC 820 are very detailed and complex. The number of security types that exist makes writing a full framework for valuation difficult to accomplish but it was a good start for consistency across a variety of investment companies ( banks, mutual funds, hedge funds, insurance companies). Now I believe the object of the reg was to provide for consistency and to add disclosures on liquidity via categorizing the portfolio into level 1,2, or 3 (1 being the most liquid 3 being the least). Now you will have to consider the timing difference between the balance sheet date and the report issuance so market events and changes in portfolios will impact the usefulness of the disclosure because things will be different in all likelihood. The disclosure so I’m frequently told does not directly address risk, so if you do look at an ASC 820 table take it at face value. All of that said if you have an auditor “flexible” would be one of the last words I would use to describe the new system. As far as leverage I think 2008 did more to cause deleveraging than any FASB regulation. Credit from counter parties was more difficult to get and investors i would think have generally less appetite for levered up balance sheets.

    I’m more interested to see how new consolidation rules will impact banks. Looking through some mortgage vehicles might impact some balance sheets.

  11. Submitted by Richard Schulze on 11/06/2011 - 03:34 pm.

    Preparing a financial statement and assessing capital adequacy seem to be separate matters. It’s not clear to me why FASB rules for valuation of assets would be binding on regulators (and vice versa, obviously).

    Would it be better to drop mark to market and expand disclosure of market values for the asset side of the balance sheet. That’s what any smart investor would want. Is 157 flawed?

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