Business Tax Code Lets Some Companies Off Easy
By Dan Haar
September 26, 2004
When you open your pay envelope this week and glance at the stub, consider this: Uncle Sam is withholding more from you than he is from some of the nation's largest and most profitable companies.
We've known for years that a few outlying corporations reap benefits from obscure tax rules that somehow slipped past our elected watchdogs in Congress.
But now it's more than just a few. A newly updated report by the Washington-based Citizens for Tax Justice and its affiliate, the Institute on Taxation and Economic Policy, shows a much grimmer picture for anyone who cares about fair tax treatment. It comes at a time when the federal deficit is north of $400 billion.
Overall, the federal corporate earnings tax is pulling in a smaller chunk of the profits of America's largest corporations, and a smaller piece of the overall economy, than it has in decades - other than a short window in the early '80s when President Reagan gave away the store. Reagan later came to his senses and signed reforms.
Among individual companies, the number that posted profits, but received rebates instead of mailing checks to the IRS, grew sharply in 2001-03 compared with 1996-98, the previous period the groups studied.
Like the gap between rich and poor families, the gap is yawning between the corporations able to ply the tax code to their extreme advantage and the ones that are not - typically smaller, less connected or in less favored industries such as retail.
It's a grim picture not simply because a dishonest ideology - President Bush's anti-government dogma - is winning the day. No, the big problem here is that we're all paying, or our children will pay, for corporate tax breaks that bring us little or nothing in return.
Connecticut has some giants whose shareholders are paying less than one might expect, the report, released Wednesday, shows. Pitney Bowes Inc. of Stamford received $56 million in rebates in the federal corporate tax between 2001 and 2003, three years in which it earned $1.8 billion in profits in the United States.
The state's largest corporate employer, United Technologies Corp., paid just $55 million in federal profits taxes in those three years, or 1.1 percent of the $5.2 billion the company earned in its home country.
But don't blame the companies. We're not talking about sleazy, three-card monte, watch-the-profits-move-to-Bermuda stuff here. These tax breaks, for the most part, reflect such clean-living claims as accelerated depreciation of assets, deduction of stock option expenses and research credits.
The question is: When do the breaks become favors to powerful interests instead of sound policy designed to reward hiring and investment?
There's no easy way to draw the line. Privacy rules prevent a clear view of who is getting what, when it comes to tax breaks. But one thing is clear: We are well beyond the sound-policy line. On the wrong side.
Each tax credit or deduction should have at its core a goal that improves society or levels a playing field. Our shining example is the mortgage deduction for households, which has landed 70 percent of American families in their own homes.
But in the byzantine tax code for corporations, "tax breaks don't encourage socially good behavior. They reward them for doing what they would have done anyway," said Robert S. McIntyre, lead author of the report and director of both agencies.
That's because political gamesmanship, not economic policy, shapes the way tax breaks are written into the books. Thursday night was a classic example.
As both houses of Congress voted to extend a popular list of tax breaks for middle-class families, Republican leaders threw in vast business giveaways, such as $9.6 billion for the tobacco industry, knowing Democrats could not be seen opposing aid to mom and pop in an election year.
Numbers in the Citizens for Tax Justice report tell the story. The report examined federal corporate earnings tax payments by 275 Fortune 500 companies that posted profits in each of the three years, 2001, 2002 and 2003.
In the last two years, the companies paid an overall average of 17.2 percent of their profits from U.S. operations. That's less than half the official tax rate of 35 percent. It compares with 21.4 percent in 2001, and 21.7 percent for a group of 250 companies in the group's 2000 report, which looked at 1996-98.
In all, the 275 companies in the latest report told Wall Street they earned $1.1 trillion over the three years, but paid $195 billion, or about $175 billion less than they would have paid at the full 35 percent rate.
Moreover, the latest report shows 82 companies that received rebates in at least one year despite posting profits; and 28 companies that gained cash back in all three years. In the 1996-98 report, 41 profitable companies were owed rebates in at least one year, and 11 in all three years.
McIntyre's groups are credited with spurring the Tax Reform Act of 1986 after they showed, in the early '80s, that the largest profitable corporations were paying federal taxes under 15 percent - at a time when the official rate was 46 percent. The reform lowered the official rate and closed loopholes, which is what should happen again.
Pitney Bowes and UTC represent different types of tax cases.
UTC said its tax reduction resulted from a large, voluntary contribution to the company's pension plan. "UTC has made over $2 billion of domestic pension contributions in the last three years," company spokesman Paul Jackson said.
That struck McIntyre, the report's author, as unusual. Normally, he said, pension contributions would be treated as a regular expense that reduces income, not as a tax deduction.
But Jackson said tax laws require deducting pension contributions in the period made.
Pitney leases to its customers the postal meters and related equipment that it makes, rather than selling them. By retaining ownership, it is able to claim depreciation, and Bush-era laws speeding the depreciation amounted to tax breaks for the company in the early years.
Pitney spokesman Matthew Broder said the company has benefited from depreciation rules in leasing other types of equipment that it doesn't make - but he said that will end as Pitney exits those lines. His point is that the company makes decisions based on strategy, not tax benefits.
Indeed, that is the point. Tax expert Richard Pomp, Alva P. Loiselle Professor of Law at the University of Connecticut, cites former Treasury Secretary Paul O'Neill's quote from his 2001 confirmation hearing: "As a businessman, I never made an investment decision based on the tax code. If you give money away, I will take it," said O'Neill, a former Alcoa CEO.
In fact, the report shows, despite huge expansions in accelerated depreciation in 2002 and 2003 - giving companies tens of billions of dollars in extra cash - the 275 companies reduced their spending on plants and equipment by about one-sixth. And history shows that companies will invest heavily if they detect demand, at high or low tax rates.
Still, as O'Neill said, shareholders are happy to take it. And they're happy to overpay their top executives, too.
Pomp, who is board president of the Institute on Taxation and Economic Policy but did not directly work on the report, said of the bevy of corporate tax breaks, "Most of these bells and whistles - you'd be hard-pressed to document that they survive a cost-benefit analysis."
Defenders of the tax breaks say corporations pay plenty, in local property taxes, sales taxes, payroll taxes and so forth. But we've got a federal government in the red. These breaks don't just pit business against labor, they pit business against business.
Consider CVS Corp., another major Connecticut employer. The Rhode Island-based drugstore company paid $1.1 billion in federal taxes on $3.2 billion in profits in 2001-03. That's 34.5 percent, which was more than any other company in the report.
Never mind hardworking families upset that many corporations don't carry their federal tax load. CVS shareholders should be screaming that they overpaid by $520 million, compared with the average breaks other big companies gleaned.