Top business tax breaks
The share of federal revenue paid by corporate income taxes has fallen dramatically over the years as a result of scores of tax breaks totaling $176 billion.
Here are the top 10 breaks and their 2013 cost:
Deferred taxes on foreign subsidiary income….. $63.4 billion
Accelerated depreciation of machinery….. $48.5 billion
Deduction of charitable contributions….. $39.3 billion
Tax-free interest on state and local bonds….. $28.4 billion
Tax-free interest on life insurance savings….. $18.9 billion
Deduction for U.S. production activities….. $12.9 billion
Credit for increasing research activities….. $8.4 billion
Credit for low-income housing investments….. $7.4 billion
Financial firm’s deferred taxes on foreign income….. $6.7 billion
Expensing of research costs….. $5.8 billion
Source: U.S. Office of Management and Budget
Georgia’s biggest public companies have become adept at avoiding taxes, with some paying a smaller share of their incomes to Uncle Sam than the typical Atlanta family.
The state’s largest 18 companies paid federal income taxes averaging 15.2 percent of global profits that often topped $1 billion a year, according to an Atlanta Journal-Constitution analysis. But some companies paid 5 percent or less. Some have paid nothing to the U.S. government in more than a decade.
The AJC looked at tax disclosures of Georgia’s 86 largest publicly-traded companies with at least $100 million in annual sales.
Overall, those companies paid an average of 16 percent of their pretax income during 2011-2013 to the IRS. That is about the same average paid by families who made more than $120,136 in 2011, according to the latest available figures from the IRS.
America’s tax collections from its corporations has been eroding for decades. That has shifted more of the tax burden on individuals, swelled the budget deficit and starved government spending on highways, national parks, security and other services.
Through moves that are perfectly legal, most U.S. companies have long paid income taxes well below the 35 percent federal corporate rate, which is nearly the highest in the world.
Companies say they pay what is legally required.
“The Coca-Cola Company is a compliant taxpayer globally,” the Atlanta beverage giant said in an email. “It pays all legally required income taxes in the U.S. and every country in which its subsidiaries operate.”
But some experts now fear that corporate tax collections could decline further if more companies join a recent wave of controversial merger deals – known as “inversions” — that allow firms to exchange their U.S. citizenship for countries with smaller tax bites.
“This rush to the exits on inversions is really amazing,” said Eric Toder, co-director of the Urban-Brookings Tax Policy Center, a Washington, D.C. think tank. Over the next decade, he said, this exodus could seriously erode Uncle Sam’s revenues.
“The corporate tax system, as it’s set up, isn’t really sustainable,” said Toder. “We need to figure some other way of taxing that income.”
Across the nation, 44 major companies – most recently Burger King — have announced or completed inversion deals since 2011, sending the federal government scrambling to try to close the door. Nothing concrete has emerged so far.
No Georgia companies apparently have taken advantage. But it could be just a matter of time, as more and more U.S. companies turn to inversions as a way to tap into overseas cash and profits without paying U.S. taxes.
According to some experts, companies like Coca-Cola — which has $18.3 billion in cash parked overseas and valuable trademarks and other assets that are highly portable — are prime candidates to become corporate expatriates.
But Coca-Cola said it is not considering such a move.
“We view ourselves as a U.S. company and have no intentions of leaving the U.S.,” a company spokesman said in an email.
Even without inversions, American companies have already mined a mother lode of tax breaks from the U.S. tax code.
Already-existing tax breaks tied to overseas operations are among the most lucrative. According to the Office of Management and Budget, global companies do not pay $63 billion last year on foreign profits that they said were indefinitely invested overseas. Overall, that and other tax breaks allowed corporations to cut their taxes by roughly $176 billion last year, according to the OMB.
With the help of existing loopholes, U.S. corporations typically pay about one-third of the 35 percent statutory rate, according to the Government Accountability Office.
The AJC’s analysis showed that Georgia’s largest firms have been able to take advantage of such tax breaks more than the state’s smaller firms, paying lower average federal tax rates as a result.
“There is nothing criminal about that. Everybody does it,” said Tad Ransopher, a tax lawyer and director of Georgia State University’s graduate tax program. Given their obligations to their shareholders, he added, “they would be fools not to do it.”
But the result, he and other critics say, is an eroding U.S. tax base and a less vibrant economy.
U.S. companies’ share of the federal budget has withered, from almost 40 percent in 1943 to about 12 percent last year, or $348 billion, according to the OMB. Meanwhile, individual taxpayers’ share has kept growing, from 27 percent of federal revenues in 1943 to 47 percent now — almost $1.4 trillion last year.
Last month, the Congressional Budget Office increased its estimate for this year’s federal deficit, from $492 billion to $506 billion, mostly due to lower-than-expected corporate tax collections.
Concerns about the eroding corporate tax base go beyond budget shortfalls.
The CBO noted that the current tax system also encourages companies to expand overseas rather than here, putting a damper on job growth and wages.
The reason companies are suddenly wooing foreign merger partners is that inversions make it easier for global firms to tap cash — by some estimates up to $1 trillion — stranded overseas as foreign profits. Otherwise, U.S. companies must pay federal taxes on profits they bring home.
Almost all of Georgia’s large public companies have found ways to pay much lower “effective” tax rates than 35 percent.
The state’s largest 18 companies — with global sales topping $5 billion — were helped by flexibility gained from their overseas operations. Over 80 percent of those firms have substantial foreign operations. Many of the largest companies paid more taxes overseas than to Uncle Sam.
On the other hand, the 68 smaller companies in the AJC’s analysis paid a higher average tax rate, 21.2 percent, partly because they had fewer overseas operations.
The AJC’s analysis is based on companies’ disclosures of so-called “current” tax expenses, which leaves out tax payments that are indefinitely postponed by tax breaks. Companies don’t disclose what income taxes they actually pay. But tax experts say companies’ disclosures of their current federal, state and local, and foreign income taxes are reasonable indicators. Companies also report how much cash they actually paid for all combined federal, state, local and foreign taxes.
The annual regulatory filings were compiled for the AJC by Calcbench, a firm that helps clients analyze data from corporations’ electronically filed disclosures.
Those disclosures show that some of Georgia’s largest global giants are among the most adept at whittling down their tax bills:
• Coca-Cola, for example, paid $3.3 billion in federal taxes over the last six years — less than 5 percent of its $65 billion in global pre-tax earnings. It was helped by $6.9 billion worth of tax breaks from past reported losses, even though the overall company has been profitable for decades. Most of those tax breaks were acquired when it bought Coca-Cola Enterprises’ North American bottling operation in 2010.
Coca-Cola said 80 percent of its business is overseas, which accounts for most of its profits and taxes.
• AGCO Corp. paid no federal income taxes for five out of the last six years, even though it reported $2.9 billion in worldwide pretax profits. It paid almost $750 million in taxes during that time – almost all overseas. Thanks to one tax break used by many global corporations, the Duluth farm equipment maker avoided U.S. taxes on $3.1 billion of profits it deemed “indefinitely invested” overseas.
AGCO said it expects to pay more U.S. taxes in the future because its U.S. operation is now profitable and it has used up tax breaks from earlier losses.
• Delta Air Lines hasn’t paid federal income taxes since 2000, and isn’t likely to for years. The airline, which had $2.5 billion in pretax profits last year, holds $15 billion worth of tax breaks from earlier losses it can use at least nine more years to avoid taxes.
“Those are absolutely real losses,” said Delta spokesman Trebor Banstetter, that were racked up during times of high fuel costs and low ticket prices. “We’re not the only airline doing this.”
But some tax experts say the United States has some of the most generous rules for how companies use past losses to cut their tax bills, allowing them to offset future profits for up to 20 years. Most countries only allow five to 10 years.
That creates too much of an incentive to resort to aggressive accounting to inflate losses reported to the IRS, said one critic.
“It makes no sense,” said GSU’s Ransopher. “If it’s not an advantage to me to lose money, then I won’t.”
Many global companies also use so-called “transfer pricing” to shift profits to overseas units in tax havens or other low-tax countries, such as the Cayman Islands and Ireland, experts said. Those subsidiaries can own the parent companies’ crown jewels — valuable patents or trademarks.
Typically, the tax haven subsidiary – sometimes just a paper company with a mailbox and little else — makes big profits by exporting key products to the parent company’s other units, but pays little or no taxes. The subsidiary, by charging high prices to other units, lowers the parent company’s taxes, too.
“It wouldn’t be troubling if they were going to a country to really invest in that country” because the size of the profits or losses would be tied to the amount invested, said Toder, with the Urban-Brookings Tax Policy Center. “On the other hand, if they’re just shifting profits, there is no limit.”
