Month: November 2011

While all of the 2012 GOP presidential candidates have had their fair share of tax policy blunders, Minnesota Republican Representative Michele Bachmann has stood out among the field for her outrageous and often factually incorrect statements about our tax system.

During the recent CNBC GOP Debate, Bachmann mentioned “47 percent of Americans who pay no federal income tax” and then took this point a step further saying that “even if it means paying the price of two Happy Meals a year, like $10, everyone can afford at least that.”

Bachmann’s statement is intentionally misleading. While many Americans do not pay federal income taxes, all Americans pay other taxes such as payroll, property, sales taxes (often on the Happy Meals they buy), and other largely regressive taxes.

Some taxpayers don’t pay federal income taxes because they are working poor families who receive the refundable parts of the Earned Income Tax Credit and the Child Tax Credit (which are available only if an adult in the family is working). Other taxpayers don’t pay federal income taxes because they are recipients of Social Security benefits, most of which are not taxed.

One recent report from CTJ found that if we set aside Social Security recipients and combine just two taxes, federal income taxes and payroll taxes, the number of Americans “not paying” drops to 15 percent, and these are concentrated among the poor.

Michelle Bachmann said other wildly inaccurate things about taxes during the same debate. For example, she claimed that the United States has an “effective” corporate tax rate of about 40 percent. She apparently was referring to the federal statutory corporate tax rate of 35 percent, which, combined with the average state statutory corporate tax rate would be around 40 percent. Of course, this is entirely different from the effective corporate tax rate, which is the percentage of profits that corporations actually pay in taxes after accounting for the wide range of tax breaks and loopholes.

The recent CTJ-ITEP report “Corporate Taxpayers & Tax Dodgers,” examines most of the Fortune 500 companies that were profitable over the last three years and finds that their effective corporate income tax rate was just 18.5 percent on average. Many major corporations like General Electric or Verizon paid nothing at all.

These corporate tax breaks and loopholes have spun so out of control in the US that despite having the second highest statutory corporate tax rate in the developed world, the US actually has the second lowest rate of corporate tax collected as a percentage of GDP.

Although Bachmann was especially brazen in the most recent debate, she has a history of outrageous tax policy statements. For example, she has advocated for the elimination of all taxes, rewritten fiscal history by claiming that the Bush tax cuts aren’t the main driver of the deficit, and promoted a job killing corporate tax amnesty program.

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The release of the corporate tax avoidance study by CTJ and ITEP last week marked a turning point in the debate over the budget deficit and tax reform. Until now, members of Congress and the Obama administration could ignore the 67-73 percent of Americans who think that large corporations pay too little in taxes.

But now, with hundreds of news stories about our findings, there is no denying the public appetite for corporate tax reform that asks profitable companies to pay their fair share.

Among other things, our report, Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010 showed that thirty large, profitable companies paid nothing in federal taxes over the last three years, and that seventy-eight had tax rates below zero in at least one of the last three years. We showed that the financial industry is making off with the biggest share of all tax subsidies, that defense contractors pay some of the lowest rates and that these major American companies end up paying about half the official tax rate because of all the loopholes in the tax code.

Indifferent to public opinion and the facts, however, too many lawmakers are caving into corporate lobbyists’ demands to actually cut corporate taxes. President Barack Obama and members of Congress in both parties are considering “revenue-neutral” reform of the corporate income tax.  This would close corporate tax loopholes, but it would put the revenue back in corporations’ pockets by reducing the statutory tax rate.

CTJ has responded with a campaign to educate lawmakers about how they can raise revenue from corporations and reject so-called “reforms” that make it easier for corporations to shift investments offshore and avoid taxes. In May, we led 250 organizations in demanding “revenue-positive” corporate tax reform. Large labor unions, including AFL-CIO affiliates and the SEIU, joined public interest organizations in opposing a “territorial” tax system, a “repatriation” amnesty as well as any corporate tax reform that fails to raise significant revenue.

The CTJ-ITEP corporate tax study makes it increasingly difficult for politicians to say with a straight face that fiscal responsibility requires cuts in health care, education, nutrition, environmental protection and other public investments while they do nothing to raise more revenue from profitable corporations.

The following are the stories of some of the most shocking tax dodgers we identify in our report.

TAX DODGER: GENERAL ELECTRIC (GE)
The Corporation Led by Obama’s “Jobs and Competitiveness” Chairman

TAX DODGER: HONEYWELL
The Corporation Led by a Member of Obama’s “Fiscal Responsibility” Commission

TAX DODGER: VERIZON
The Corporation Battling the Communication Workers of America to Cut $1 Billion in Employee Benefits

TAX DODGER: WELLS FARGO
One of the Biggest Bailed Out Banks

TAX DODGER: DUKE ENERGY
The North Carolina Corporation Pushing Senator Hagan and Others to Support a Repatriation Amnesty

TAX DODGER: BOEING
A Major Defense Contractor Lobbying Against Military Spending Cuts

The Corporation Led by Obama’s “Jobs and Competitiveness” Chairman

In March, activists called on Jeffrey Immelt, CEO of GE, to step down from his position as chairman of President Obama’s Council on Jobs and Competitiveness following revelations that GE had a negative corporate income tax rate over the past several years.

The New York Times had just reported that the nearly 1,000-person tax department of GE managed to achieve a negative corporate income tax rate over a 5-year period, partly by lobbying Congress for more tax loopholes. The article included all sorts of details that were damaging for GE. For example, it explained how the director of GE’s tax department literally “dropped to his knees” in the House Ways and Means office as he begged for — and won — the extension of a tax cut for financing through offshore subsidiaries.

A couple months earlier, President Obama had appointed Immelt chairman of his Council on Jobs and Competitiveness, which is to give “advice to the President on continuing to strengthen the Nation’s economy and ensure the competitiveness of the United States.” After the Times article was published, former U.S. Senator Russ Feingold launched a petition calling on Immelt to resign from his position as chairman of the council.

GE’s tax avoidance entered the spotlight again in July, when Immelt endorsed a proposed repatriation amnesty. This proposal would call off almost all U.S. taxes on profits that U.S. corporations are currently holding offshore. These profits are normally subject to the difference between the U.S. corporate income tax and whatever foreign corporate income taxes were already paid (if the U.S. tax is greater) when the profits are brought back to the U.S. A recent report from a Senate investigations committee headed by Carl Levin (D-MI) found that a lot of these profits are stashed away in offshore tax havens where the corporations are likely to be doing no real business.

The Corporation Led by a Member of Obama’s “Fiscal Responsibility” Commission

On November 17, the conservative Tax Foundation is presenting its “Distinguished Service Award” to Republican House Speaker John Boehner and Honeywell CEO David Cote, who was appointed by President Obama to serve on the National Commission on Fiscal Responsibility and Reform (often called the “Bowles-Simpson Commission”).

It’s unsurprising that Speaker Boehner’s obstruction of any deficit deal involving revenue has earned him an award from the (Anti-) Tax Foundation. The case of Cote is more interesting. As a member of the fiscal commission, he voted in favor of a broad plan that would rely on spending cuts to achieve two-thirds of its deficit reduction goal and revenue increases to achieve just one-third of that goal, a plan that was panned by CTJ and others. The deal also included “tax reform” that clearly would not raise taxes on corporations overall.

In April, Cote spoke at a public event about the budget deficit where he was asked twice about a press release issued by CTJ that morning explaining that Honeywell did not pay any corporate income taxes in 2009 or 2010 and paid very low taxes over the past several years despite its profits. Within a matter of hours, Honeywell sent a letter to CTJ essentially saying that the company correctly reported large profits to its shareholders for the last two years but used available tax loopholes to report losses to the IRS.

CTJ’s director, Bob McIntyre, wrote a letter back to Honeywell that concludes:

“So I think we agree on the following: The reason why Honeywell, despite reporting substantial pretax U.S. profits to its shareholders, paid no federal income tax in 2009 or 2010 (or more precisely, paid less than zero) is that it took advantage of legal tax breaks to wipe out its federal income tax liability. We may disagree, however, about whether these tax breaks should exist.”

(See the CTJ press release and correspondence between Honeywell and CTJ.)

The Corporation Battling the Communication Workers of America to Cut $1 Billion in Employee Benefits

In August, 45,000 Verizon employees went on strike to protest the company’s push for employees to give back $1 billion in health, pension, and other contract concessions.

CTJ commented at the time that Verizon’s stance is particularly galling given that Verizon is both highly profitable and already a model of poor corporate citizenship. Despite earning over $32.5 billion over the last 3 years, Verizon not only paid nothing in corporate income taxes, it actually received nearly $1 billion (the same amount as the concessions they are seeking) in tax benefits from the federal government during that time.

As Verizon’s tax avoidance again received media attention following the publication of CJT’s major report last week, the company responded that the president of the Communication Workers of America, which organized the strike against Verizon, sits on the board of CTJ.

We’re not entirely sure what this is supposed to prove. If having the CWA president on our board makes our analysis biased, then surely anything said by Verizon’s tax department or spokespersons is even more biased since they actually work for Verizon.

More importantly, Verizon never actually offers any profit or tax figures that conflict with those in the CTJ study. The company’s spokesperson complains that the study does not count “deferred” taxes. (These are taxes that a company may pay in the future but has not paid yet, rendering them irrelevant.) He also says that the company “fully complies with all tax laws and pays its fair share of taxes.” Of course, CTJ has said from the beginning that the tax avoidance techniques used by Verizon and other corporations are (as far as we know) legal, and that’s why we know the tax system needs to be reformed by Congress.

One of the Biggest Bailed Out Banks

Last week a federal court decided against Wells Fargo in an $80 million tax shelter case. In the challenged deal, which government attorneys called a “charade” and an attempted “raid on the federal Treasury,” Wells Fargo claimed a $420 million capital loss from the transfer of “underwater” leases to a subsidiary and a related sale of stock to Lehman Brothers. The transaction had no business purpose other than tax avoidance, the court said, and was a sham tax shelter purchased from the international accounting firm KMPG for $3 million.

Our corporate tax study found that the financial industry as a whole had an average effective federal income tax rate of 15.5 percent for the 2008-2010 period and Wells Fargo’s rate was -1.4 percent. Wells Fargo also topped the list of companies with the largest tax subsidies, receiving $17.9 billion in tax subsidies over that three-year period.

A significant factor in their low tax rate is the deduction of net operating losses (NOLs) that were bought in the Wachovia acquisition. Tax law normally limits the deductibility of acquired NOLs, in order to keep companies from acquiring other companies just to reduce their taxes, but the Bush Treasury Department gave Wells Fargo a one-time exception from those rules. Congress quickly passed a law to prohibit Treasury from granting those exceptions in the future, but the law does not apply retroactively, which means Wells Fargo continues to enjoy the tax savings from Wachovia’s NOLs.

The North Carolina Corporation Pushing Senator Hagan and Others to Support a Repatriation Amnesty

In June, the organization Third Way hosted an event in Washington at which a group of politicians, corporate leaders and others argued in favor of a tax amnesty for profits U.S. corporations hold offshore. (See the transcript of the event.) CTJ and other groups have long opposed a repatriation amnesty, noting that it provides the greatest benefits to those companies that simply shift their profits into tax havens.

Jim Rogers, the CEO and president of the North Carolina company Duke Energy, spoke in favor of a repatriation amnesty, as did North Carolina’s Democratic Senator, Kay Hagan.

Towards the end of the event, the audience members asked a series of questions that the panelists were unable to answer adequately. For example, a CTJ staffer commented to the panelists:

If I understand, I think what you’re saying is that the nonpartisan Congressional Research Service was wrong in issuing a study that said that the last time this was tried it did not create jobs, and that the nonpartisan Joint Committee on Taxation was wrong recently when it had its analysis saying that if we repeat this repatriation holiday, it will cost $79 billion over 10 years, partially because some of those profits would have been brought back anyway; partially because, ultimately, corporations will shift even more profits offshore, meaning even if your only goal is to get more of these profits into the U.S., even in that limited goal, you fail on that. So do I understand correctly that you think that the nonpartisan Congressional Research Service and the nonpartisan Joint Committee on Taxation are incorrect and Congress should ignore these analyses?

We were not entirely surprised that no one had a good response to this. What did surprise us, however, was that Duke Energy is already avoiding corporate income taxes, which we learned as we prepared our major corporate tax study.

Duke Energy had profits of $5.5 billion over the 2008-2010 period but received $216 million from the IRS over that period, for a three-year effective tax rate of negative 3.9 percent.

Despite its already remarkable tax subsidies, Duke Energy now wants to bring its offshore profits back to the U.S. and pay almost no U.S. taxes on them.

A Major Defense Contractor Lobbying Against Military Spending Cuts

In June, James Zrust, vice president of tax for the defense contractor Boeing, testified before the House Ways and Means Committee in favor of a steep reduction in the corporate income tax rate. One member of the committee, Congressman Pete Stark of California, cited a short report from CTJ explaining that Boeing’s effective corporate tax rate was already negative.

Boeing made $9.7 billion in profits over the 2008-2010 period but received $178 million from the IRS over that period, for an effective corporate income tax rate of negative 1.8 percent. How much lower does Boeing think its effective tax rate should be? Interestingly, Boeing actually had negative effective tax rates in all three of those years.

Given Boeing’s recent $35 billion deal to build airborne tankers (that is, $35 billion paid by U.S. taxpayers) it’s reasonable for Americans to expect Boeing to pay taxes when it makes a profit.

Defense spending has increased 70 percent since 2001 and many usually hawkish pundits and analysts are now calling for defense cuts. Boeing, of course, is lobbying against any defense cuts and disputing the commonsense notion that cuts in defense should play some role in deficit reduction.