Many of the country's biggest corporations are once again paying little or nothing in federal income taxes, according to a new study by the Institute on Taxation and Economic Policy (ITEP).
Corporations are supposed to pay 35 percent of their profits in taxes. But the 250 companies in ITEP's survey paid only 20.1 percent in 1998. That figure was down from 22.9 percent in 1996 and way below the 26.5 percent big companies paid back in 1988, when they had yet to figure out ways around the loophole-closing 1986 Tax Reform Act.
Forty-one companies actually paid less than zero in federal income taxes for at least one year from 1996 to 1998. They reported a total of $25.8 billion in pretax profits. Rather than paying $9 billion in federal income taxes at the 35 percent rate, the companies enjoyed so many excess tax breaks that they received $3.2 billion in rebate checks from the U.S. Treasury. In other words, they made more money after taxes than before!
Among the 24 big-name companies getting tax rebates in 1998 were Texaco, Chevron, CSX, PepsiCo, Pfizer, J.P. Morgan, Goodyear, Enron, General Motors, Phillips Petroleum, Northrop Grumman--well, you get the idea. The large number of oil companies on the no-tax list reflects the fact that over the 1996-1998 period, petroleum was the lowest-taxed industry in America, with an effective rate of only 12.3 percent. (In 1998 the rate on the 12 big oil companies in the study fell to only 5.7 percent.)
Further, 133 of the 250 companies in ITEP's survey paid effective tax rates of less than half the 35 percent rate for at least one of the three years (and many did it more than once). In the years that these 133 corporations paid at such low rates, a mere 8.5 percent of their $209 billion in profits went to taxes.
Another way to measure which companies play the most games with the tax system is to add up their tax breaks, based on what they actually paid compared to what the 35 percent corporate tax rate ostensibly requires. For all 250 companies, tax breaks from 1996 to 1998 totaled $98 billion. Almost half of that amount went to just 25 companies, each getting more than $1 billion in tax breaks. General Electric topped the list, with $6.9 billion in tax breaks over three years.
Many of the ways that companies avoid taxes are familiar, such as excessive depreciation write-offs and tax credits for research, oil drilling, and doing business in Puerto Rico. General Electric continues to slash its tax bills every year through its leasing activities, where it essentially buys tax breaks from companies that have more than they can use.
But the scope of one relatively new tax break, stemming from stock options, was a bit of a surprise to ITEP's researchers. When stock options are exercised, corporations can take a tax deduction for the difference between what employees pay for the stock and what it's worth--even though in reporting their profits to shareholders, companies don't treat these stock-option costs as business expenses.
ITEP found that 233 of the 250 companies lowered their taxes from stock options by a total of $25.8 billion over the three years. Microsoft led the pack with $2.7 billion in stock-option tax benefits. Since such benefits are dependent on how much a company's stock has gone up in value, the tax savings were especially large in high-tech industries whose market valuations zoomed during the three-year period.
Effective tax rates varied wildly among both companies and industries. Over the three-year period, rates ranged from a low of -9.9 percent on Goodyear to a high of just over 35 percent on Winn-Dixie and PACCAR. Industry tax rates ranged from the oil companies' 12.3 percent up to the 31.6 percent paid by publishers.
This is a pretty crazy system. And it's not just the general public that should be complaining. Companies are using tax laws to get unfair advantages. For instance, Maytag and General Electric both make kitchen appliances. But Maytag paid 35 percent of its profits in taxes from 1996 to 1998 while General Electric paid only 8.1 percent. Likewise, Abbot Laboratories and Pfizer are both in the drug business, but the former paid almost 29 percent of its profits in taxes from 1996 to 1998 while the latter paid only 3.1 percent.
The Alternative Minimum Tax was supposed to reduce these discrepancies and make sure that every company with substantial profits pays some significant tax. But legislation adopted in 1993 and 1997 has pretty much gutted the minimum tax.
The bottom line of ITEP's study is that, more than a decade after the major corporate tax reforms of 1986, we now see a resurgence in corporate tax avoidance. Our representatives in Washington can solve this problem if they want to. The question, as always, is whether they have the will.