Facing South

The corporate raid on state tax revenue

Facing South
Facing South
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By Phil Mattera, Dirt Diggers Digest

One of the usual canards of the corporate tax reduction crowd is that high U.S. rates force large companies to invest offshore instead of at home. The Institute on Taxation and Economic Policy and Citizens for Tax Justice have just issued the second installment of their detailed refutation of the myth of oppressive rates.

After putting out a report last month showing that many large corporations end up paying far less than the statutory federal rate (so much less that their rates often become negative), ITEP and CTJ now demonstrate that the story is the same at the state level. Their study, Corporate Tax Dodging in the Fifty States, lists 68 Fortune 500 companies that managed to pay no state income tax at all in at least one year during the period from 2008 through 2010 despite posting a total of nearly $117 billion in pre-tax U.S. profits during those no-tax years.

Sixteen of the companies -- including the likes of DuPont, Tenet Healthcare, International Paper, Intel and  Peabody Energy -- had more than one no-tax year. DuPont, Pepco Holdings and American Electric Power contributed nothing to state coffers in all three years. The report points out that, if the 265 companies in the sample had all paid the average 6.2 percent average corporate tax rate on their combined $1.33 trillion in U.S. profits, their state tax bill would have been about $82 billion. Instead, they paid only $40 billion, meaning that states were left without $42 billion in revenue that could have been used to help pay for education, healthcare, transportation, public safety and other key state government functions.

A system that allows many companies to sidestep millions of dollars in state tax payments can hardly be called onerous and certainly can't be the reason for investing overseas. It is thus no surprise that the ITEP/CTJ list of firms with negative or minimal tax rates includes corporations that engage in extensive offshoring; among them are Eli Lilly, General Electric, Hewlett Packard and Merck.

At the same time, the key state tax dodgers include some manufacturing companies that have (at least in part) bucked the offshoring trend and made substantial investments in the United States. Chief among them are Intel and Boeing.

Intel, which has been spending billions on semiconductor fabrication plants in state such as Arizona, and Boeing, which focuses its aircraft assembly in Washington State and South Carolina, are major recipients of the kind of company-specific tax breaks that the ITEP/CTJ report cites as one of the reasons for the decline of state corporate income tax collections.

Intel has been playing the subsidy game in earnest since 1993, when it announced plans for what was then an unprecedented $1 billion investment in a new chip plant, to be built in a suburb of Albuquerque called Rio Rancho. The company pressured local officials to provide what would ultimately amount to about $455 million in property tax abatements and sales tax exemptions on the equipment purchased for the facility.

Soon after getting its way in New Mexico, Intel put the squeeze on officials in Arizona, where it proposed to build another plant in Chandler, a suburb of Phoenix. The company received some $82 million in property tax abatements, sales tax exemptions and corporate income tax credits. In 2005 Intel strong-armed the state to change the method by which it calculates corporate taxes to a system known as single sales factor, which allowed Intel and other companies with lots of property and a big payroll but relatively low sales in the state to enjoy enormous tax reductions.

In 1999 Intel announced plans for a large expansion of its semiconductor operations in Oregon but made it clear that the investment was contingent on receiving a property tax abatement that turned out to be worth an estimated $200 million over 15 years. In 2005 Intel got the county to extend the property tax break to 2025, locking in an estimated $579 million in additional savings. Intel also enjoys a substantial reduction in corporate income taxes thanks to Oregon's decision to join the single sales factor bandwagon.

Boeing has also sought special tax breaks and other subsidies in multiple states. When the company was ready to begin production of its much-anticipated Dreamliner, it forced Washington to compete with around 20 other states for the work and agreed to stay there only after the legislature in 2003 approved a package of research & development tax credits and cuts in Business & Occupation taxes (the state's substitute for a corporate income tax), sales taxes and property taxes that together were estimated to be worth $3.2 billion over 20 years.

Rather than showing its appreciation to Washington, the company went shopping for a better deal for the second Dreamliner production line. It chose South Carolina, where it was awarded a subsidy package that has been valued at more than $900 million and is able to take advantage of a "right to work" law that discourages unionization. The Machinists union accused the company of retaliating against union activism in Washington, but the complaint has just been withdrawn as part of a deal in which Boeing will build its new 737 in the Seattle area.

While it was once taken for granted that large U.S. corporations would do most of their investing at home, companies such as Boeing and Intel now act as if they are doing the country a favor with their domestic projects and expect to be rewarded handsomely in the form of special state tax breaks on top of those business-friendly provisions available to all firms.

Far from being held back by tax rates, large U.S. corporations invest offshore or onshore as they please while contributing as little as possible to the cost of public services.
 

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