Tax-Exempt For-Profits Avoid Paying their Share

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Let’s see if we get this right. Nonprofits are leeches on society, they don’t pay taxes, they take our money (your money) and fail to pay their own way, they pay their executives exorbitantly, they spend too much on administrative costs, and, oh yes . . . they don’t pay taxes. This is worth saying twice, since taxes have become the prime mover of politics in recent years.  

The argument is so tiresome, so monotonous, and so ill founded. It’s time to correct the record, not in tabulating how much taxes nonprofits actually pay (and they do: as employers paying matching employees’ FICA, as service providers frequently paying registration and licensing fees, as property owners paying user fees for water and sewerage, etc.), but in terms of how many tax-paying entities don’t pay the taxes they are supposed to pay or receive tax rebates.

Nonprofits are hardly the only tax-exempt nongovernmental entities in the U.S. By happenstance, hook, and crook, for-profit corporations frequently don’t pay taxes, get legislative bodies to exempt them from taxes, and they often pay their executives at levels that leave entire nonprofit budgets in the dust.

Compared to the relatively small number of nonprofits with revenues and real estate, the for-profit sector’s multiple navigation strategies to avoid federal, state, and local taxes leads to a basic question – which sector is the real tax-exempt sector? 

If you know the way, you don’t have to pay—at the federal level

The crushing burden of federal taxes seems to leave many corporations much less crushed than nonprofits being hit with Unrelated Business Income Taxes (UBITs):

.  This past March, Senator Bernie Sanders (I-VT) provided a list of corporate tax evaders, several of which are among the nonprofit sector’s most trustworthy corporate philanthropic benefactors:

1) Exxon Mobil made $19 billion in profits in 2009. Exxon not only paid no federal income taxes, it actually received a $156 million rebate from the IRS, according to its SEC filings.

2) Bank of America received a $1.9 billion tax refund from the IRS last year, although it made $4.4 billion in profits and received a bailout from the Federal Reserve and the Treasury Department of nearly $1 trillion.

3) Over the past five years, while General Electric made $26 billion in profits in the United States, it received a $4.1 billion refund from the IRS.

4) Chevron received a $19 million refund from the IRS last year after it made $10 billion in profits in 2009.

5) Boeing, which received a $30 billion contract from the Pentagon to build 179 airborne tankers, got a $124 million refund from the IRS last year.

6) Valero Energy, the 25th largest company in America with $68 billion in sales last year received a $157 million tax refund check from the IRS and, over the past three years, it received a $134 million tax break from the oil and gas manufacturing tax deduction.

7) Goldman Sachs in 2008 only paid 1.1 percent of its income in taxes even though it earned a profit of $2.3 billion and received an almost $800 billion from the Federal Reserve and U.S. Treasury Department.

8) Citigroup last year made more than $4 billion in profits but paid no federal income taxes. It received a $2.5 trillion bailout from the Federal Reserve and U.S. Treasury.

9) ConocoPhillips, the fifth largest oil company in the United States, made $16 billion in profits from 2007 through 2009, but received $451 million in tax breaks through the oil and gas manufacturing deduction.

10) Over the past five years, Carnival Cruise Lines made more than $11 billion in profits, but its federal income tax rate during those years was just 1.1 percent.

Business Insidermagazine added additional big corporations, not necessarily those with the name recognition of those on the Sanders list, that are paying next to no federal taxes:

·       NextEra Energy:  Pretax profits of $8.572 billion, effective tax rate of 1.74 percent

·       Xcel Energy:  Pretax profits of $4.334 billion, tax rate of 1.78 percent

·       Amazon:  Pretax profits of $3.512 billion, tax rate of 4.33 percent

·       Host Hotels and Resorts:  Profits of $1.116 billion, tax rate 3.05 percent

·       TECO Energy:  Profits of $1.62 billion, tax rate of 2.31 percent

Note that several of these corporations actually received tax rebates, putting their effective tax rates into the realm of negative percentages.  In several cases, such as Exxon Mobil and Bank of America, their zero tax rates in 2009 were simply an extension of the lack of taxes they paid the previous year.  In fact, many corporations over the years have managed to make their profits immune to taxation.  A 2008 Government Accountability Office study found that more than half of U.S. companies doing business in the U.S. had paid no income taxes for at least one year between 1998 and 2005 and 42 percent had not paid taxes for at least two years. 

If you don’t want to pay, ask permission not to play—corporations working the states

The appearance of Amazon on the list of mega-corporations that pay little or nothing is worth noting.  Remember that many of these corporations that pay next to nothing to the federal government sometimes find themselves paying taxes to state governments – and they often don’t like it. 

Some time ago, Amazon got huffy with the state of Texas – where corporations pay almost nothing even when they’re paying full taxes – because the state tried to hit Amazon with a sales tax bill.  Amazon’s position was that the state had no right to tax e-commerce. Texas argued that Amazon’s big distribution center in Irving gave Amazon a physical presence in the state and thus triggered its eligibility to pay the sales tax. (Note that putative presidential candidate Rick Perry seemed to side with Amazon against the state comptroller, Susan Combs.)  The law is clear:  Retailers with a brick-and-mortar physical presence in the state have to collect sales taxes on sales to customers there, but no physical presence, no sales tax. 

After initially threatening to shut down its Irving plant, Amazon cooked up a deal for the state.  It would make a capital investment of $300 million in “five or six warehouse and distribution centers” in Texas in return for not having to charge customers sales tax for the following four-and-a-half years.  The plan would generate 5,000 or 6,000 jobs. The numbers reported suggest that Amazon will save more in sales tax payments than it will invest in the facilities – and the centers are of course to be owned by Amazon, they aren’t gifts to the state. 

This deal wasn’t just cooked up by Governor Perry and the Texas legislature.  Amazon has negotiated these sales tax exemptions with other states as well. In South Carolina, Amazon has pledged to invest $125 million and create 2,000 jobs by 2013 in return for being exempted from collecting and paying sales taxes from customers.  Amazon has a similar deal with Tennessee. It isn’t like Amazon is trying to balance off the sales tax against the high corporate tax rate in Texas. Texas doesn’t have a corporate tax at all. 

In revenue-starved Michigan, Fannie Mae and Freddie Mac, two of the nation’s most profitable companies – until they led the Wall Street decline into recession – have never had to pay real estate transfer taxes on properties they have sold in the state. Though governmentally supported, the two mortgage behemoths are private for-profit corporations, though they invoke an ersatz nonprofit status on occasion as in Michigan. The treasurer of Oakland County, Mich., has hit the two GSEs with a bill for $12 million in real estate transfer fees, explaining, “Fannie and Freddie you quack like a duck (or a private corporate entity), so you better pay up.”

It is no surprise to most readers that states frequently offer corporations tax bargains or no tax bills at all if they will relocate their facilities. For example, just this month, Florida Governor Rick Scott wrote a letter to the Chicago Mercantile Exchange offering a neat tax package if the Exchange would move to the Sunshine State. Scott made the pitch after reading in the Wall Street Journalabout the Exchange’s frustration with the 8.9 percent rate in Illinois.  Scott isn’t necessarily being partial to the Mercantile Exchange.  He actually has proposed the elimination of all state corporate taxes, though the Florida legislature has yet to agree with the notion.

It would be hard to imagine that Fannie and Freddie needed a free pass from Michigan for their real estate transfers, the Chicago Mercantile Exchange a cut rate bargain on corporate taxes in Illinois, or Amazon a sales tax collection break in Texas.  But that’s the way the game is played.  If a corporation can find a loophole for sidestepping a potential tax bill, they’ll jump at the chance. 

If you don’t pay property taxes, you might be a for-profit corporation—abatements for businesses and developers

This isn’t new stuff, to be sure.  For what seems like eons, states and localities have been giving away the store to big corporations that have somewhat more robust tax-paying power than nonprofits.  In most cases, governments prefer giving corporations tax subsidies as opposed to direct subsidies, because in the arcana of state and local budgets, property tax abatements and exemptions don’t show up as a negative. 

The diminutive payments corporations make pursuant to abatements show up as net positives – money accreting to tax coffers that in theory wouldn’t have otherwise been show up as a positive, even though they are less than what the corporations would have paid had they paid normal property taxes – like your and I do.

Ostensibly the quid pro quo, like Amazon’s offer to Texas and South Carolina, is job creation, but the abatements rarely achieve the results. The truly famous example is Pennsylvania’s offer of $70 million in subsidies to a European auto manufacturer to create a manufacturing plant in the southwestern part of the state to create 10,000 jobs; its highest employment ever was 6,000 and the plant closed within a decade.  A couple of decades later, Alabama gave another European auto manufacturer $253 million in subsidies to create 1,500 jobs, a cost per job of roughly $169,000 (PDF).

There are often multiple kinds of tax abatements offered to business – straight tax abatement deals, abatements tied to enterprise zones, redevelopment project incentives, etc.  Few states even know the cumulative value of what they offer or what they’ve given away. 

·       A report on tax abatements awarded by governments in Tennessee confessed that it couldn’t even identify all of the entities pitching abatements, but based on admittedly incomplete data, it concluded that governments had given away $105.2 million in 2001 and $104.3 million in 2002 in tax abatements to private entities leasing public property for commercial purposes (PDF).  No cost-benefit analysis was available to determine what was achieved through these economic development agreements, much less whether the cost was worth the benefit. A 2010 study by the New Jersey State Comptroller on tax abatements there didn’t even bother to attempt a calculation of the total property tax giveaway to entities that were supposed to be paying property taxes (PDF).

·       Do you think Goldman Sachs is going to pack up and leave the New York metropolitan area?  New York and New Jersey must believe it and have offered the immensely profitable firm lots of abatements for its office towers in Manhattan and Jersey City.  New York City gave Goldman $200 million in tax breaks for is 43-floor office tower in Lower Manhattan and then somehow tossed the firm another $140 million in property tax breaks. Across the Hudson River, Goldman built a 42-story complex with the incentive of $160 million in tax incentives and has negotiated new abatements for a second yet-to-be-built office building.  Is Goldman hard up for cash?  Not with profits per employee of $1.4 million in 2009, twice the 2008 level, not with net earnings (profit) of $8.35 billion for calendar year 2010 (PDF), a little down from 2009’s $13.39 billion

·       A 2004 study by Good Jobs First examined the public subsidies (not just tax abatements, but also free or significantly discounted land, corporate tax credits, and more) supporting 84 of 91 Wal-Mart centers and stores, with an estimated governmental giveaway to the retail behemoth of $624 million (PDF). 

·       Boeing has been a mainstay of Seattle’s corporate landscape forever, but in 2001, the corporation announced it was moving its corporate headquarters out of Seattle and induced a property tax cutting competition among Chicago, Denver, and Dallas/Fort Worth. The local and state government generosity was noteworthy, with Chicago’s package offering the most to the company, a package of $56 million in subsidies for only 500 jobs. That shook up Seattle officials, so that when Boeing announced its plans to find a new location for manufacturing its 7E7 “Dreamliner” passenger jet, the state put together a $3.2 billion/20 year subsidy package, basically freeing Boeing of most local taxes

·       A 2009 study by the state of Nevada yielded some information on the sales and use tax exemptions granted the Nevada Commission on Economic Development (almost doubling from $18.9 million in fiscal year 2007 to $34.8 million in fiscal year 2008 – for 22 businesses (PDF)). 

The reality about corporate tax breaks at the state and local level is troubling from a public policy perspective:

·       State governments and localities don’t even know how much they’re giving away.  There is no accounting available to even the officials who are supposed to monitor what they’re giving corporations.

·       The abatements and exemptions offered to corporations are by choice, not by law.  Legislatures and city councils are choosing to give specific corporations specific tax breaks. 

·       The purported quid pro quos offered by businesses for their abatements are hard if not in most cases impossible to enforce, clawback provisions or otherwise. 

·       For many corporations, the expectation of abatements is automatic.  It isn’t that they will bolt from Manhattan to Omaha if they don’t get abatements.  Both local governments and corporations know this, but the abatements are almost automatic anyhow. 

·       Businesses actually employ consultants—lobbyists—who are sometimes paid a percentage of the tax savings.  Securing tax abatements for businesses is now an industry.

·       Local government officials who know that the corporations can well afford to pay their tax bills are whipsawed between demanding corporations on one side and skittish legislatures on the other.  For many officials, it isn’t a matter of agreeing to or rejecting an abatement application, but trying to negotiate the best possible payment from the corporation possible.

·       Corporations sometimes come back for additional, layered abatements, even when projects fail, so that the projected subsidy cost of a project at the front end is hardly the true total subsidy cost at project completion.

It is difficult to imagine that the public, no matter what taxpayers think of what nonprofits do or do not pay as property taxes (in the form of payments in lieu of taxes or user fees), thinks that museums, hospitals, universities, and other nonprofit facilities are positive contributions to their communities.  In contrast, read the conclusion of a 2007 report on corporate tax credits and tax abatements in Connecticut: 

We were unable to determine the aggregate jobs associated with firms that claimed tax credits and/or abatements during the study period…DECD’s analysis concludes that several Connecticut tax credit, property tax abatement and exemption programs have negative or very limited positive impacts. Other programs have had little or no participation. (PDF)”

A critical report (PDF) on Jersey City’s tax abatements for developers and corporations concluded that “all that glitters is not gold.”  The glitter is in the coffers of the corporations that are raking in tax abatements and other incentives without much impact on job creation or other concrete, measurable economic development activities. 

Corporate executives earning more than entire nonprofits

The total revenues of most nonprofits are lower than the compensation packages for corporate executives. According to the AFL-CIO’s 2011 Executive Paywatch, the average annual compensation for CEOs of S&P 500 companies in 2010 was $11,358,445, with a base salary of over $1 million, a bonus of more than $250,000, stock awards of $3.8 million, and option awards of $2.4 million. 

Compare those executive salaries to the entire annual revenues of public charities.  Nine out of ten registered public charities (all 501(c)(3) nonprofits except for private foundations) and nine out of ten public charities filing 990s reported revenues of less than $1 million, according to the latest statistics compiled by the Urban Institute’s National Center for Charitable Statistics.

Overpaid nonprofit CEOs?  It’s clear that the majority of nonprofits, not to mention their executive directors, are hardly raking in much money, even as state legislatures and city councils aim at nonprofits for tax-like revenues. The executives of the tax-exemptfor-profit corporations make more money than the bulk of entire nonprofit organizations generate as revenues to support their tax-exempt programs:

Exxon Mobil:  In 2010, R. W. Tillerson’s total compensation as CEO was $28,952,558

Bank of America:  Brian T. Moynihan’s 2010 compensation was $1,940,069

General Electric:  Jeffrey R. Immelt’s total compensation in 2010 was $21,428,765

Chevron:  J.S. Watson’s total compensation was $16,260,528

Boeing: In 2010, W. James McNerney Jr. received $19,740,023

Valero Energy:  William R. Klesse’s total compensation was $11,103,385

Goldman Sachs:  Lloyd Blankfein’s compensation was $14,116,423

Citigroup:  Vikram Pandit earned $1 million

ConocoPhillips:  James J. Mulva took in $17,932,895

Carnival Cruise Lines:  Micky Arison’s total compensation was $7,097,709

Amazon:  CEO Jeffrey Bezos’s total compensation in 2010 was $1,681,840

NextEra:  In 2010, Lewis Hay III received $13,560,217

Xcel:  Richard C. Kelly’s total compensation was $9,956,433

Maybe it’s obvious, but we’ll say it: The big corporate tax scofflaws, headed by CEOs with multi-million dollar compensation packages, are increasingly paying little or no taxes despite billions of dollars in profits. Why aren’t members of Congress, state legislatures, and municipal councils looking to the for-profit tax exempts to pay their fair share instead of trying to eke nickels and dimes out of the organizations that due to their 501(c)(3) status are truly supposed to be tax exempt?  Something is awry with public policy decision-makers’ understanding of what the “nonprofit” actually means and it’s tiresome and monotonous. 

  • Michael Wyland

    It’s hard to know where to start with this column. First, I hope it was a cathartic experience for Mr. Cohen; there’s a lot of anger there.

    It’s important to note that nothing Mr. Cohen documents in his column is illegal. Tax *avoidance* is the legal and legitimate minimizing of tax obligations. If the column were addressing illegal or tortious conduct, the proper term would be “tax *evasion*.” Therefore, phrases such as “by hook or by crook” and words such as “scofflaws” are inaccurate to the extent they imply illegal or otherwise actionable conduct.

    There is also the problematic use of the term “fair share” when referring to tax obligations. It’s marvellously vague, so that each person can attribute their own number to it and each can be self-satisfied of being “correct” in their judgement. [I’m reminded of the local newspaper reporter who told me, haughtily, that no nonprofit CEO should make more than $50,000 a year. I e-mailed her a copy of The Chronicle of Philanthropy’s latest salary survey .]

    The practice of states, cities, and counties offering tax abatements in exchange for business development has, indeed, degenerated into a race to the bottom that benefits corporations. Governments are pitted against each other in a bidding war that often results in businesses receiving discounts for doing things they would have done anyway.

    However, not all governments engage in this practice indiscriminately, and some governments actually keep track. I know that developing incentive packages is a complex calculus involving both short-term and long-term costs and benefits for both governments and businesses.

    For example, the value of many years of property tax abatements can be made up for entirely through assessment of contractors excise tax and other taxes assaociated with building construction. This is not to mention the ongoing taxes paid by relocating employees, other businesses (vendors & suppliers, services) that spring up in support of a relocating business, etc.

    Surely we who work with the nonprofit sector can recognize that just because someting is not taxed does not mean it has no net community value!

    My father was a practicing attorney who handled both malpractice plaintiffs and malpractice defense work. When he presented to medical conferences, he observed that: 1) there *is* such a thing as malpractice; and 2) it occurs far less frequently than is generally believed.

    I think we have a similar situation here, concerning both for-profits and nonprofits. Hyperbole on both sides generates much heat but little light. A more nuanced and broader-based approach helps cooler heads make reasoned judgements and recommend balanced options for regulatory and statutory change. Statutory change in reaction to hyperbole results in unintended consequences that usually hurt more than they help.

  • C T Lytle

    I was engaged in this conversation just yesterday at a July 4th picnic. Geneva, NY (pop. 10,000 +-) ranks #4 in New York State as having the most tax exempt property – some 60% of the property is owned by nonprofit corps. The local newspaper has published a very well done four-installment on the pro’s and con’s of having so much off the books, and the city, like many, is trying to develop a formula to tax these local nonprofits, the largest being Hobart & William College and the Cornell Agricultural Station. The issues embedded in this story (tax abatements, etc) are another important perspective on this timely argument. There are good points to be made on both sides, but at the end of the day, nonprofits tend to be easy targets when tax money is short, and the contribution they provide somewhat less visible. Without these anchor (nonprofit) organizations providing an intellectual and culture anchor, this small upstate community might be just another anonymous, struggling community surrounded by dairy farms. It certainly would not be in any way the same community that is made possible by the presence of nonprofits, even without their tax money.

  • Dave Estrada

    Thanks for keeping this dialogue going. This paragraph in your story sums it up perfectly:
    Local government officials who know that the corporations can well afford to pay their tax bills are whipsawed between demanding corporations on one side and skittish legislatures on the other. For many officials, it isn

  • Terry Fernsler

    I think you miss the point here. Legal activity does not necessariy make it moral, especially when you consider that the legal system is usually slow to adapt to changing social mores. It’s short-sighted (not to mention petty) to demand payment from nonprofits, many of which, by the way, have limitations to protesting, when those with much more resources are allowed to mooch off the rest of us. My friends who live in subsidized housing pay more in taxes than GE.