Tax Day arrives this year amid a growing outcry over tax avoidance by large corporations such as General Electric. Corporate tax dodging, however, is not only about the offshore havens and accounting loopholes that GE's 975-person tax department exploits to the max. It's also about economic development subsidies.
The vast majority of “incentive” dollars that state and local governments provide to companies in the name of job creation consist of tax breaks: property tax abatements, corporate income tax credits, sales tax exemptions and rebates, etc.
Business apologists would have us believe that such tax deals encourage companies to increase their investments and their hiring, resulting in higher tax collections. However, too many subsidies are structured “as of right,“ making them windfalls that pay companies to do what they would have done anyway. And as the growing numbers of clawback episodes tell us, many companies end up not hiring as many people as they promise when negotiating the deals. Subsidy deals are often so lavish that, even at a higher level of business activity, the tax obligations of the recipients remain artificially low.
To illustrate this, here are three examples of prosperous companies that are frequent subsidy recipients and are paying meager amounts in state and local taxes (as reported in the notes to their recently published 2010 financial statements).
State taxes: The semiconductor giant reports that it paid only $51 million in state and local taxes in 2010, which is less than one percent (0.37 percent to be more exact) of its $13.9 billion in pretax U.S. profits. In the previous two years it reported negative amounts, meaning that it received net refunds.
Subsidies: Intel is one of the most aggressive companies in the nation when it comes to seeking giant subsidy deals and preferential tax treatment. It has obtained hundreds of millions of dollars in property tax abatements and sales tax exemptions in states such as Arizona, New Mexico and Oregon when building its large chip fabrication plants and has successfully campaigned in various states for the adoption of a corporate income tax computation system known as Single Sales Factor, thereby avoiding many millions more in tax payments.
A great deal of the taxes that Intel has avoided should have gone to pay for schools. Brazenly ignoring his company’s contribution to the problem, former Intel chief executive Craig Barrett recently
Arizona's educational system, saying it is so weak that it inhibits the attraction of new business.
State taxes: The aerospace leader reports that it expects to receive a net tax refund of $137 million from state and local governments for 2010, despite earning more than $4 billion in U.S. pretax profits for the year. For the past three years combined, Boeing’s total state and local net tax bill was only $28 million on domestic pretax profits amounting to $9.7 billion—a rate of less than one-third of one percent.
Subsidies: Boeing rivals Intel in its unrelenting quest for tax breaks. Although Washington had long been the company’s manufacturing base, in 2003 Boeing let it be known that it would build its new Dreamliner aircraft somewhere else if the state did not approve what turned out to be a 20-year, $3.2 billion package of tax credits and abatements. Despite that concession, when it came time to build a second Dreamliner production line, Boeing chose to locate it in South Carolina after that state provided a subsidy package that is estimated to be worth more than $900 million.
State taxes: For 2010 Cabela’s expects to pay less than one million dollars ($769,000 to be exact) in state and local taxes. That represents not even one half of one percent of the company’s $167 million in pretax profits.
Subsidies: Cabela’s is a much smaller company than Intel and Boeing, but it is the largest retailer focused on hunting and fishing gear and other outdoor sporting goods. It has used its popularity to drive hard bargains with nearly all of the roughly 30 localities where it has built its big-box stores. The company has received subsidy packages totaling more than $500 million for its outlets, which it promotes as tourist attractions (its taxidermy displays are sometimes legally structured as museum condominiums, making those portions of the stores exempt from property taxes). In its financial reports Cabela’s acknowledges that these deals are an essential part of its business plan. Local officials, however, have sometimes found that the new sales tax revenues generated by the giant stores have fallen short of levels projected to justify the subsidies.
Big Picture: Burden Shift
Intel, Boeing and Cabela’s are just a few of the many large corporations getting lucrative subsidy deals that minimize their state tax bills. The aggregate effects of this and other sorts of business-oriented fiscal policies are dramatic. According to the U.S. Census Bureau, corporate income tax payments contributed only 5.4 percent of total state tax collections last year, down from nearly 10 percent in 1980. This trend is a significant factor in state budget deficits.
When large corporations pay less, households and small businesses have to pay more, or the quality of schools and other public services declines, or some of both. Something to think about as you prepare your state tax return.
Note: We follow the lead of Citizens for Tax Justice and the Institute on Taxation and Economic Policy in considering only the reported figures for current income taxes, ignoring the deferred amounts.