According to a report issued this week by Citizens for Tax Justice (CJT) and the Institute on Taxation and Economic Policy (ITEP), many of the nations largest companies are paying little or no federal income taxes. The study examined federal income taxes paid by 275 of the country's largest, most profitable companies and found that the overall effective tax rate on these companies between 2001 and 2003 was 18.4 percent, nearly half the statutory 35 percent rate.
Nearly a third of the companies paid zero taxes or received a rebate in at least one year between 2001 and 2003. For example, Maryland-base Marriott reported earnings of $383 million in 2003, yet received a federal tax rebate of $38 million, for an effective corporate income tax rate of -10 percent.
"With significant help from Congress, corporations appear to be finding their way around the tax reforms adopted in 1986," said ITEP Director Robert S. McIntyre. "We hope that our findings will encourage lawmakers to reexamine this important area of taxation."
According to the report, the reason for this trend in part is due to a major expansion in corporate tax breaks in 2002 and 2003, along with continued failure by Congress and the White House to curb abusive corporate offshore tax sheltering, corporate tax avoidance has skyrocketed.
- Eighty-two of the 275 companies, almost a third of the total, paid zero or less in federal income taxes in at least one year from 2001 to 2003. Many of them enjoyed multiple no-tax years. In the years they paid no income tax, these companies reported $102 billion in pretax U.S. profits. But instead of paying $35.6 billion in income taxes as the statutory 35 percent corporate tax rate seems to require, these companies generated so many excess tax breaks that they received outright tax rebate checks from the U.S. Treasury, totaling $12.6 billion. These companies’ “negative tax rates” meant that they made more after taxes than before taxes in those no-tax years.
- Twenty-eight corporations enjoyed negative federal income tax rates over the entire 2001-03 period. These companies, whose pretax U.S. profits totaled $44.9 billion over the three years, included, among others: Pepco Holdings (–59.6% tax rate), Prudential Financial (–46.2%), ITT Industries (–22.3%), Boeing (–18.8%), Unisys (–16.0%), Fluor (–9.2%) and CSX (–7.5%), the company previously headed by our current Secretary of the Treasury.
- In 2003 alone, 46 companies paid zero or less in federal income taxes. These 46 companies, almost one out of six of the companies in the study, reported U.S. pretax profits in 2003 of $42.6 billion, yet received tax rebates totaling $5.4 billion. In 2002, almost as many companies, 42, paid no tax, reporting $43.5 billion in pretax profits, but $4.9 billion in tax rebates. From 2001 to 2003, the number of no-tax companies jumped from 33 to 46, an increase of 40 percent.
- After 2001, the average effective rate for all 275 companies dropped by a fifth, from 21.4 percent in 2001 to 17.2 percent in 2002 and 2003, less than half the statutory 35 percent corporate tax rate that corporations ostensibly are supposed to pay.
Legislation adopted in 2002 and 2003 vastly increased corporate write-offs for “accelerated depreciation” and made it easier for corporations to use their excess tax subsidies to generate tax-rebate checks from the U.S. Treasury, at a three-year cost of $175 billion. Backers of those so-called “incentives” said they would encourage new corporate investments in plant and equipment. But the study finds that they failed to do so:
- The 25 companies in the study who reported the largest tax savings from accelerated depreciation — garnering two-thirds of the total depreciation benefits for all 275 companies over the three years — cut their total property, plant and equipment investments by 27 percent from 2001 to 2003.
- In contrast, the remaining 250 companies reduced their investments by only 8 percent. Overall, the 275 companies in the study reported that their capital investments fell by 15 percent from 2001 to 2003.
- Likewise, the 25 companies in the survey with the largest total tax breaks from all sources over the three years (getting half of the total tax breaks for all 275 companies) cut their capital investments from 2001 to 2003 by 22 percent. In contrast, the remaining 250 companies in the survey reduced their investments by 13 percent.
The five industries whose companies got the largest average benefits, on a per-company basis, from accelerated depreciation over the 2001-03 period received 61 percent of the total depreciation benefits.
- From 2001 to 2003, these five industries — telecommunications, petroleum and pipelines, transportation, gas and electric utilities, and electronics and electric equipment — reduced their capital investments by 22 percent. In contrast, the remaining 15 industries reduced their investments by only 9 percent.
“We do not mean to imply in our report that corporate tax breaks actively discourage capital investments,” McIntyre said. “But the evidence shows, as it has so often in the past, that business investment decisions are primarily driven by supply and demand, not by government attempts to micro-manage the economy. The $175 billion in revenues lost to the tax subsidies enacted in 2002 and 2003 appears to have been exceedingly poorly spent.”
Source: Citizens for Tax Justice and the Institute on Taxation and Economic Policy