The Nearly Tax Exempt Sector: Big For-Profit Corporations

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November 8, 2011; Source: Bloomberg News |¬†Earning $160.3 billion in pretax profit must have been very difficult for 30 companies between 2008 and 2010, because despite their profitability these giant firms were let off the hook that most readers of the NPQ Newswire face: these 30 corporations didn’t pay any federal income tax over that three-year period. Among the 30 were General Electric, Verizon Communications, Pepco, and Boeing. In fact, both Pepco and GE actually have negative tax rates. These are among the findings of a report issued by Citizens for Tax Justice and the Institute on Taxation and Economic Policy titled “Corporate Taxpayers & Corporate Tax Dodgers, 2008–10”.

Corporations are none too happy with the study, debating the findings and pointing to the union connections of CTJ, but sometimes, even for corporations, they might find some uncomfortable truths in research generated by groups linked to the “oppo.” The report examined 280 Fortune 500 corporations that did not show losses for any of the three years in question, and published corporate annual reports to shareholders and 10-K forms provided to the Securities and Exchange Commission with enough information to calculate the firms’ federal tax rates.

Among the 30 companies paying no federal taxes for the entire three-year period were, in addition to those above, PG&E Corporation, American Electric Power, Ryder System, Baxter International, Duke Energy, DuPont, Consolidated Edison, Navistar International, Wells Fargo, Mattel, Honeywell International, and Corning. Thirty-seven companies paid no federal income tax in 2010, the most recent tax year of the study, including Yahoo, Capital One Financial, and International Paper. Overall, for the three-year period, 111 of the 280 (40 percent) paid an effective tax rate of less than 17.5 percent—compared to the top U.S. corporate tax rate of 35 percent. The average rate of the corporations in the study was 18.5 percent. Our favorite is of course General Electric (whose CEO is a special jobs advisor to President Obama), which earned $10.5 billion in pretax profit during the three-year period and had an effective tax rate of negative 45.3 percent.

How did this happen? CNN Money says that “at the root of the problem is a system of inverted incentives that encourages corporations to lobby for special tax breaks”, some of them relatively widespread (and lucrative), such as accelerated depreciation of investments in equipment, some of them industry-specific, such as specific provisions applicable to the corporate-owned utilities. Oddly, despite so many highly profitable corporations paying effective federal taxes well below 35 percent, Republicans in Congress are looking to send a signal to the corporate sector to reduce the tax rate to 25 percent. For those companies paying nothing at all, a reduction from 35 percent to 25 percent as the top corporate tax rate has no meaning.

What does all of this say to the nonprofit sector? Fundamentally, the message to tax-exempt nonprofits is, you are not alone. There exist virtually tax-exempt entities that are highly profitable: mammoth for-profit Fortune 500 corporations. In many cases, these entities have received unbelievable amounts of government subsidy (Wells Fargo, $17.9 billion, AT&T, $14.5 billion, Verizon, $12.3 billion, General Electric, $8.4 billion, etc.). When nonprofits are challenged about their tax impacts (in terms of forgone revenues) and government subsidies, they should realize that nonprofits barely register compared to the billions devoured by the big corporations. Perhaps GE (rather than its foundation) will receive an invitation to join Independent Sector or the Council on Nonprofits as a functioning tax-exempt entity. Or maybe not.—Rick Cohen