Read the PDF of this Report. 

Last November, Citizens for Tax Justice and the Institute on Taxation and Economic Policy issued a major study of the federal income taxes paid, or not paid, by 280 big, profitable Fortune 500 corporations. That report found, among other things, that 30 of the companies paid no net federal income tax from 2008 through 2010. New information for 2011 shows that almost all these 30 companies have maintained their tax dodging ways.

In fact, all but four of the 30 companies remained in the no-federal-income-tax category over the 2008-11 period.

Over the four years:

• 26 of the 30 companies continued to enjoy negative federal income tax rates. That means they still made more money after tax than before tax over the four years!

• Of the remaining four companies, three paid fouryear effective tax rates of less than 4 percent (specifically, 0.2%, 2.0% and 3.8%). One company paid a 2008-11 tax rate of 10.9 percent.

• In total, 2008-11 federal income taxes for the 30 companies remained negative, despite $205 billion in pretax U.S. profits. Overall, they enjoyed an average effective federal income tax rate of –3.1 percent over the four years.

“These big, profitable corporations are continuing to shift their tax burden onto average Americans,” said Citizens for Tax Justice director Bob McIntyre. “This isn’t fair to the rest of us, it makes no economic sense, and it’s part of the reason our government is running huge budget deficits.”

The Size of the Tax Subsidies:

Had these 30 companies paid the full 35 percent corporate tax rate over the 2008-11 period, they would have paid $78.3 billion more in federal income taxes. Or put another way, over the four years, the 30 companies received more than $78 billion in total tax subsidies. Wells Fargo alone garnered $21.6 billion in tax subsidies over the four years, followed by General Electric ($10.6 billion), Verizon ($7.7 billion), and Boeing ($6.0 billion).

Taxes in 2011:

In 2011 alone, 24 of the 30 companies paid effective tax rates of less than 4 percent, including 15 that paid zero or less in federal income taxes in that year. For all 30 companies, the average 2011 effective federal income tax rate was a paltry 7.1% — only a fifth of the statutory 35 percent federal corporate tax rate.

The Bottom Line:

The information on these 30 companies helps illustrate why overall federal corporate income tax collections are so low. The Treasury Department reports that corporate taxes fell to only 1.2 percent of our gross domestic product over the past three fiscal years. That’s lower than at any time since the 1940s except for one single year during President Reagan’s first term. By comparison, corporate taxes averaged almost 4 percent of our GDP during the 1960s.

“Getting rid of corporate tax subsidies that cause such widespread tax avoidance ought to be a key part of any deficit-reduction program,” said McIntyre. “As a bonus, revenue-raising corporate tax reform would make it much easier to fund the investments we need to improve education and repair our crumbling roads and bridges — things that would actually help businesses and our economy grow.”

Note: The 30 no-tax corporations over the 2008-10 period reported in CTJ’s November 2011 report included Computer Sciences, which had a negative 18.3% tax rate over the three years. Computer Sciences has an odd fiscal year, and will not file its financial statements until this summer. However, in entering 2011 data for Apache, we discovered that we had missed a well-hidden entry in Apache’s financial statements for excess stock option tax benefits. Including these tax benefits lowered Apache’s effective 2008-10 tax rate from +0.6% to –1.5%. As a result, we have included Apache in the 2008-10 notax list for this updated report.

For more charts and appendixes read the PDF here.

This presentation was given to participants of the Ecumenical Advocacy Days, an event that brings the perspectives of faith-based organizations to Capitol Hill. The presentation explains federal tax issues that are being debated today.

Read the presentation.

Recent polls show a large majority of Americans, including small business owners, are convinced that profitable corporations are not paying enough in taxes. Citizens for Tax Justice and U.S. PIRG’s Loopholes for Sale pursues the intersection of corporate campaign contributions to members of Congress and the absence of Congressional action to close corporate tax loopholes and raise additional revenue from corporate taxes.

The report includes the following findings:

• 280 profitable Fortune 500 companies collectively received $223 billion in tax breaks between 2008 and 2010 while contributing $216 million to Congressional candidates over the last four election cycles.
  
  
• The thirty most aggressive tax dodging corporations—dubbed the “Dirty Thirty”— collectively paid a negative tax rate between 2008 and 2010 while spending $41 million on Congressional campaign contributions.
  
  
• Of the 534 current members of Congress, 524(98 percent) have taken a campaign contribution from one or more of these thirty corporations since the 2006 election cycle.

Full Report Here

Read Our Press Release With Key Findings

Check Out the Special Report Landing Page

Read the PDF of this report.

Facebook announced this month that it plans to give its co-founder and controlling stockholder, Mark Zuckerberg, a $2.8 billion cash windfall. Amazingly, Zuckerberg’s bonanza will cost Facebook absolutely nothing. Well, actually, a lot less than nothing, since it will help save Facebook, Inc. a staggering $3 billion in federal and state corporate income taxes.

      These tax breaks are expected not only to wipe out all of Facebook’s federal and state income taxes for 2012, but also to generate a $0.5 billion tax refund of taxes the company paid in the past.

      According to Facebook’s SEC filing (in connection with its upcoming initial public stock offering), the company has issued options to favored employees which will allow them to purchase 187 million Facebook shares for little or nothing in 2012. Options for 120 million of these shares (worth $4.8 billion) are owned by Zuckerberg. The company indicates that it expects all of the 187 million vested options to be exercised in 2012.

      Under current tax law, exercise of all of the options will generate $7.5 billion in tax deductions for Facebook, which will produce $3 billion in federal and state tax reductions for the company. According to Facebook:

“we estimate that this . . . option exercise activity would generate a corporate income tax deduction [that] exceeds our other U.S. taxable income [and] will result in a net operating loss (NOL) that can be carried back to the preceding two years to offset our taxable income for U.S. federal income tax purposes, as well as in some states, which would allow us to receive a refund of some of the corporate income taxes we paid in those years. Based on the assumptions above, we anticipate that this refund could be up to $500 million.”

As for the future, Facebook adds:

“Any portion of the NOL remaining after this carryback would be carried forward to offset our other U.S. taxable income generated in future years, which taxable income will also be reduced by deductions generated from new stock award settlement and stock option exercise activity occurring in those future years.”

      Senator Carl Levin, who has proposed to limit the stock option tax loophole, told the New York Times, “Facebook may not pay any corporate income taxes on its profits for a generation. When profitable corporations can use the stock option tax deduction to pay zero corporate income taxes for years on end, average taxpayers are forced to pick up the tax burden. It isn’t right, and we can’t afford it.”

      Whatever one may think about the propriety of Zuckerberg’s huge personal gain, at least he will have to pay federal and state income taxes (at ordinary tax rates) when he exercises his $4.8 billion worth of stock options. Certainly, we need not pity him for his big tax bill, since even after paying his taxes, he’ll still end up with $2.8 billion.

      But the $3 billion in accompanying tax breaks that will go to Facebook, Inc. are another story. As Senator Levin points out, those corporate tax breaks are unjustified.

      A little history is helpful here. Prior to 2006, the rules governing how corporations treated stock options for shareholder-reporting purposes were in complete conflict with how stock options were treated for corporate tax purposes. The Financial Accounting Standards Board (FASB) thought that options should not reduce corporate profits reported to shareholders, while IRS allowed companies to deduct the full value of exercised options. Since corporations are eager to report as high as possible “book” profits to their shareholders and as low as possible taxable profits to the IRS, this was the ideal world from the point of view of corporations.

      It seemed obvious to logical observers that one of these approaches had to be wrong. Yet each agency had an argument for its position, because each addressed the issue from a very different perspective:

      a. FASB’s pre-2006 rule that stock options are not a real cost to corporations reflected first, the fact that the options have zero cash cost to the companies, and second that options neither decreases a company’s assets nor increased its liabilities. All in all, a seemingly airtight case.

      b. In contrast, the IRS concluded (and continues to conclude) that because exercised options are treated as taxable wages to employees, “symmetry” requires that they be treated as tax-deductible wages for employers.

      In CTJ’s view, FASB’s pre-2006 position (no book expense) was right,[1] and the IRS’s position (employer tax deduction) is wrong.

      While the IRS is wrong about stock options, its “symmetry” argument was not pulled out of the air. The tax code often does try to match income received by workers with a corresponding deduction for employers. But that’s not always the correct answer (or what the tax code specifies).

      For example, if an airline allows its workers to fly free or at a discounted price on flights that aren’t full (for vacations, etc.), then the workers ought to be taxed on that fringe benefit, even though the airline incurs no measurable cost in providing it. But no one has ever suggested that airlines should get a tax deduction (beyond actual cost) for letting their employees fly for free or at a discounted price.

      In the case of stock options, there is a clear economic benefit to the employees (if the stock goes up in value), but a zero cost to the the employer. So it’s more reasonable to conclude that while employees should be taxed on stock option benefits (“all income from whatever source derived” as the tax code states), employers should only be able to deduct their cost of providing those benefits, which is zero.

      A final argument, made by some economists, is that a corporate write-off for stock options (book and tax) is appropriate because of the theoretical cost to a company’s shareholders when new stock is issued at a discounted price to employees. For example, suppose a company has 100 shares of stock outstanding, worth $10 a share. If the company gives its CEO 100 shares of newly issued stock for free, then the value of the other 100 shares ought to fall to only $5 a share.

      But in real life, this potential “dilution” effect on stock prices to shareholders is typically quite minor. In the case of stock options, any dilution “cost” is even smaller, if not nonexistent, since the “cost” occurs only when the price of the stock has gone up!

      Most important, just because a company does something that has a cost to its shareholders does not mean that it should or does generate either a book expense or a tax deduction for the company. For example, suppose a company’s stock is selling at $10 a share. The company, in need of more cash, issues a large block of new stock at $9 a share to attract a prominent new investor (say Warren Buffett). The pre-existing shareholders are theoretically hurt by this discount, but it doesn’t generate a book cost to the company or a tax deduction

      The bottom line is that there’s something obviously wrong with a tax loophole that lets highly profitable companies make more money after tax than before tax. What’s about to happen at Facebook offers a perfect illustration of why non-cash “expenses” for stock options should not be tax deductible — or book deductible either.

Photo of Facebook Logo via Dull Hunk and photo Mark Zuckerberg via KK+ Creative Commons Attribution License 2.0

^[1]Unfortunately, in 2006, FASB responded to political pressure and muddied its previously-correct  position. Starting it 2006, FASB required companies to book an expense in calculating profits reported to shareholders for the estimated future value of stock options to their recipients. This new book write-off is calculated when the options are issued, well before the true value at exercise can possibly be known. Not surprisingly (since corporations want to report high profits to their shareholders), these book write-off estimates are always wrong, and are generally much lower than the tax-deductible amount.

        This new financial treatment of options is widely derided by stock analysts. Indeed, companies for which options are significant go to great pains to encourage investors and analysts to ignore these non-cash “expenses” in evaluating the companies’ earnings — often offering an alternative earnings report that ignores them.

Marking the second anniversary of the Supreme Court’s decision in the Citizens United vs. Federal Election Commission case, this report takes a hard look at the lobbying activities of profitable Fortune 500 companies that exploit loopholes and distort the tax code to avoid billions of dollars in taxes.

Full Report Here

Press Release Here

We identify the “Dirty Thirty” companies that were especially aggressive at dodging taxes and lobbying Congress. These companies so deftly exploited carve outs and loopholes in the tax code that all but one of them enjoyed a negative tax rate over the three year period of the study, while spending nearly half a billion dollars to lobby Congress on issues including tax policy. Altogether they collected $10.6 billion in tax rebates from the federal government.

Ordinary American taxpayers and small businesses must pick up the tab when major corporations avoid their taxes. Spread out over every individual tax filer in America, the taxes avoided by the Dirty Thirty break down to an average of $481 per taxpayer over the three years.

A total 280 profitable Fortune 500 companies collectively paid an effective federal income tax rate of 18.5 percent, about half of the statutory 35 percent corporate tax rate, while receiving $223 billion in tax subsidies.

These corporations include most of the Fortune 500 companies that were consistently profitable from 2008 through 2010. Collectively they paid $250.8 billion in federal income taxes on a total of $1,352.8 billion in U.S. profits. If they had paid the statutory 35 percent tax on their profits, they would have paid an extra $223 billion. There are thousands of perfectly legal ways that corporations, with the help of armies of high-paid lawyers and accountants, can reduce their tax burden

These 280 companies spent a total of $2 billion lobbying on tax and other issues between 2008 and 2010.

The report explains why exploiting offshore tax havens is an example of tax dodging at its worst and that at least 22 of the Dirty Thirty reported subsidiaries in offshore tax havens like the Cayman Islands. Since profit artificially shifted offshore is often counted as “foreign” profits, the data likely underestimates the amount lost due to tax havens.

To stop the abusive use of tax havens, we lawmakers must end rules allowing U.S. companies to defer taxes on their offshore profits. In the meantime, there are concrete steps Congress can take that would stop the worst of the abuses by requiring more honest rules and reporting.

To limit corporate money in elections, lawmakers should:

• Require full and honest disclosure – the public should know who is funding what candidates
• Empower shareholders – the shareholders that own corporations should have a say in how corporations spend their money on elections
• Reverse Citizens United

Full Report Here

NEW REPORT: 280 Most Profitable U.S. Corporations Shelter Half Their Profits from Taxes.

“These 280 corporations received a total of nearly $224 billion in tax subsidies,” said Robert McIntyre, Director at Citizens for Tax Justice and the report’s lead author. “This is wasted money that could have gone to protect Medicare, create jobs and cut the deficit.”

• 30 Companies average less than zero tax bill in the last three Years, 78 had at least one no-tax year.

• Financial services received the largest share of all federal tax subsidies over the last three years. More than half the tax subsidies for companies in the study went to four industries: financial services, utilities, telecommunications, and oil, gas & pipelines.

• U.S. corporations with significant foreign profits paid tax rates to foreign countries that were almost a third higher than they paid to the IRS on their domestic profits.

Check Out the Special Report Landing Page

Full Report Here

Read Our Press Release With Key Findings

Efforts by Congressional leaders to extend unemployment insurance (UI) benefits are entirely reasonable. It is unfortunate, however, that the price of providing this necessary help will be tax breaks to corporations and to the housing industry. The expansion and extension of both the homebuyer credit and the "net operating loss carryback" are ill-advised.

Read the report.