Pepsico paid no federal income tax in 1998 despite earning $1.6 billion. But wait, it gets worse .... read on ... following story filed Oct. 20, 2000. Source: Christian Science Monitor.
Headline: New survey shows 24 top US companies got refunds.
By David R. Francis
Staff writer of The Christian Science Monitor
Uncle Sam sent Texaco a $67.7 million tax refund check in 1998. Though it declared $182 million in profits, the giant oil company paid no corporate income tax.
PepsiCo got $302 million from Washington. It, too, paid no corporate tax that year on $1.6 billion in profits.
Cisco Systems, the second most valuable company in the US, paid no federal income taxes in its latest fiscal year. That despite making $2.7 billion in net earnings.
Finding tax loopholes to take advantage of is a tradition as old as the abacus.
To most corporations, it's a mark of good business. But to critics, it's an unfair way of beating the system that leaves more of the tax burden to others.
Now fresh evidence shows that the use of tax loopholes by some of the largest corporations in America is growing.
Coming at a time of a booming economy - and in many cases record corporate profits - it is sure to revive the debate over the responsibility of business in modern society.
Tax loopholes are springing up like crab grass in summer, charges Bob McIntyre, director of the Institute on Taxation and Economic Policy (ITEP), a Washington think tank.
Using legal tax dodges, 24 big companies escaped any federal income-tax burden and got Treasury checks instead in 1998, finds a new ITEP study of 250 of the nation's largest and most profitable firms.
"With significant help from Congress, corporations appear to be finding ways around the tax reforms adopted in 1986," says Mr. McIntyre.
His study comes at a time of public uneasiness with Big Business. A poll by Business Week found 66 percent of Americans believe that large profits are more important to big companies than developing safe, reliable, quality products for consumers.
The ostensible federal tax rate on corporate profits is 35 percent. But many firms, if not most, pay less than that percentage.
The ITEP study suggests the real rate is going down. The 250 companies paid only 20.1 percent on profits in 1998, down from 22.9 percent in 1996.
I want my break, too
Individuals, of course, also take advantage of any tax breaks they can find. The marginal federal income tax rate for the richest taxpayers is nominally 39.6 percent. But a study by the Joint Committee on Taxation of Congress found their actual tax rate for all federal taxes (income, payroll, excise, etc.) is about 28.5 percent of income.
Nonetheless, it annoys many taxpayers when they hear that multibillion-dollar companies escape all income taxes when they can't. They figure that what companies don't pay, individuals may have to make up in extra taxes.
Indeed, the ITEP study calculates that had all the 250 companies paid the full 35 percent rate on their $735 billion in pretax US profits from 1996 to 1998, they would have paid an extra $98 billion in corporate income tax.
Business interests say the ITEP study gives the wrong impression. Gordon Richards, chief economist with the National Association of Manufacturers, says the 250 companies examined represent "a biased sample."
For one thing, a company may pay little or no taxes one year because of unusual tax losses or deductions, but pay far more in prior or subsequent years.
Looking at all corporate taxes paid also changes the picture, according to Mr. Richards. Government statistics show these amounted to 35.5 percent of profits after inventory valuations and capital consumption adjustments in 1986.
The percentage dropped to 28.3 percent in 1998, and about 30 percent in most of 1999. Adding in state corporate taxes brings the percentage up to 32.4 percent in 1998.
"That is not a small tax liability," Richards says. "That doesn't suggest corporations are engaged in widespread abusive practices."
Determining actual corporate tax liabilities for the past three years is difficult. IRS figures aren't available. So the Commerce Department makes its best estimate, says Martin Sullivan, an economist with Tax Notes, a tax publication in Arlington, Va.
For his part, Mr. Sullivan believes there has been a decline in recent years in corporate taxes paid out despite rising profits.
But he sees a turnaround this year. Corporate tax revenues reported by the Treasury for the first 11 months of this fiscal year are up about 13 percent. In that same period, corporate profits grew about 9 percent, estimates Standard & Poor's DRI, a Lexington, Mass., consulting firm.
Corporations use several means to reduce their tax burden. The biggest is accelerated depreciation of assets, such as machinery and buildings. Other tax breaks are designed to encourage such things as research and development and oil exploration.
One rapidly spreading corporate tax break is stock options. It has been of great benefit to Cisco, Microsoft, and many other New Economy companies.
Under this approach, businesses give executives and other employees stock options as part of their compensation. This is regarded as an incentive for hard work, and it is cheaper than normal cash pay.
When an employee "exercises" his options - converts them to stock - the company can take the difference between the price the worker pays and the current market price of the stock as a tax deduction. This is craziness, according to Bill Parish, an investment adviser and pension consultant in Portland, Ore. Though the company pays out no cash, it still gets a tax deduction.
What's uncertain is whether tax laws will change any time soon. A similar corporate survey by McIntyre in the early 1980s, showing corporate giants (such as General Electric) ducking taxes entirely, helped shape public opinion prior to the 1986 reforms.
Evidence is growing of impatience with tax loopholes again today. The Clinton administration has been pushing for legislation to eradicate what it calls "abusive tax shelters."
Presidential candidate Ralph Nader has spoken out against the option loophole.
A federal district judge in Delaware a few days ago sided with the Internal Revenue Service in disallowing interest deductions claimed by Camelot Music, a unit of CM Holdings. The judge called the transaction "a sham."
Earlier this month, leaders of the Senate Finance Committee proposed tough new laws to crack down on shelters. They would impose hefty fines on those promoting sham transactions to evade taxes. But passage of such a measure this year seems unlikely considering the legislative jam in Washington and the inaction so far of the House Ways and Means Committee.
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