Cash-flush corporations at center of income-tax debate
U.S. multinationals represent the healthiest segment of the economy, with higher profits and more than $1 trillion of cash on hand. This has kept corporate tax reform alive as a political issue.
ON Semiconductor had a solid 2014, boosting net income by 36 percent to $196 million on revenue of $3.17 billion. Yet the Phoenix-based semiconductor company didn’t pay any income taxes on balance for the year, instead receiving a small net tax benefit of under $1 million — not unlike individuals who receive refunds after filing their returns this time of year.
On Semiconductor’s situation isn’t all that unusual, especially for manufacturing and technology firms that can take advantage of various credits, deductions and exclusions. While U.S. corporations face a statutory income-tax rate of 35 percent, many household-name companies occasionally pay much less than that. Microchip Technology of Chandler paid less than 9 percent in its most recent fiscal year; American Express paid 9 percent, and General Electric 10 percent.
It’s these types of examples that rekindle the debate on corporate income taxes — traditionally a significant source of revenue for governments but one that has become less important over time. Uncle Sam collects only about 11 percent of its total tax revenue from this source, while Arizona is reducing its dependence by slashing the state corporate tax rate over four years.
Corporate income taxes are a political football that touches on a lot of other areas — globalization, American industrial competitiveness and even the nation’s rich-poor gap through the double taxation of earnings.
“In today’s globalized economy, the structure of a country’s tax code is an important factor for businesses when they decide where to invest,” noted a report written by Kyle Pomerleau and Andrew Lundeen at the Tax Foundation, a fiscally conservative group that wants to see the U.S. cut its corporate rate. Nations can’t tax businesses at high rates without hurting their economic performance, they say.
Compared with recession years like 2009 when big losses cut tax liabilities, corporate income taxes aren’t making as many headlines today with the economy improving. Yet the topic continues to percolate, especially with so many multinationals flush with cash and profits near record-high levels.
Critics of high taxes, including many Republicans, look at the top 35 percent rate and worry that America’s most important companies are being burdened more than global rivals. That 35 percent corporate rate is among the highest in the world.
Critics also complain that net income earned by corporations is taxed twice — once at the corporate level and again as profits flow through to shareholders as dividends and capital gains. That shareholders tend to be affluent adds a political twist: People in the top one-fifth of income earners pay 79 percent of corporate income-tax liabilities, making this one of the most progressive taxes around, according to a December report by the Congressional Research Service.
But others point out that most corporations pay income taxes (including those to states and foreign governments) below the maximum rate, thanks to credits, deductions and exemptions. Effective corporate rates in the U.S. are near the global average — 27.1 percent for the U.S. against 27.7 percent for other member nations of the Organization for Economic Cooperation and Development. Critics, including many Democrats, also wonder why some world-class corporations can get away with paying little if any income taxes, as sometimes happens.
Even Apple Inc., the most valuable corporation in the history of the planet, paid a mild 26 percent in 2014.
A WalletHub study of the 100 most valuable U.S. corporations found that four — Amgen, AIG, General Electric and Abbott Laboratories — paid effective rates of 3 to 6 percent in 2013, while Ford Motor got a tax refund. (The study hasn’t been updated with 2014 results.)
But in general, big companies paid effective rates averaging 28.3 percent, WalletHub said. Exxon Mobil, CVS Health, Lowe’s, Chevron and other companies paid rates near 40 percent. The number of top-100 firms receiving refunds fell from six in 2012 to just Ford Motor in 2013.
Tax rates for individual companies bounce around from year to year. For example, after getting a net benefit in 2013, Ford paid nearly 27 percent in 2014. That same year, levies paid by Exxon and other big oil companies fell as lower crude prices cut profitability.
Arizona’s only top 100 entrant, Freeport-McMoRan, paid $1.48 billion in taxes and a 30 percent rate in 2013. But with oil and metals prices triggering a loss for the company last year, Freeport-McMoRan’s 2014 tax bill dropped to $324 million.
The average effective tax rate for all public companies, not just the most valuable and profitable ones, is lower — around 20.5 percent in 2013, according to Aswath Damodaran, a New York University finance professor.
Corporate income taxes account for a smaller share of government revenue than in decades past. Yet profits for big U.S. companies have bounced back nicely and these firms hold record levels of cash — $1.43 trillion at the end of 2014 for corporate giants in the Standard & Poor’s 500, reports FactSet. No wonder big companies make a tempting target to help fund government operations.
Government revenue generation isn’t the only consideration. Nations and states sometime reduce tax rates to compete better against one another. Arizona is cutting its state corporate-tax rate from 6.5 percent in 2014 to 4.9 percent by 2017. Arizona also offers various credits that businesses can use to shave taxes further. Arizona’s tax structure compared to other states currently is about average: For 2014, the Tax Foundation ranked Arizona near the middle of the pack.
Compared with property, sales and individual income taxes, corporate tax collections can be volatile. They also can be difficult to determine, especially for states trying to figure their share for a national or global company, said Kevin McCarthy, president of the Arizona Tax Research Association. Internet sales have muddled the picture further, he adds.
That’s why McCarthy senses a shift away from corporate taxes as a revenue generator for Arizona and other states. “I think more states will reduce their reliance on them,” he said.
At any rate, corporate income taxes are only one of many factors that influence company decisions on where to locate operations.
At the federal level, corporate income taxes have been on long slide in terms of their importance to government finances. They accounted for 32.1 percent of federal revenue in the peak year of 1952, then steadily dropped to just 6.6 percent in recession-marred 2009, when profits tumbled. Since then, as profits recovered, corporate tax collections have rebounded to more than 10 percent of government revenue.
Various factors explain the longer-term decline, including more multinational activity and the use of alternative business formats such as partnerships and sole proprietorships that avoid taxation as corporations.
Different from personal taxes
Corporate income taxes differ from personal income taxes in key ways. For starters, corporations are taxed on their profits or net income, while individuals pay taxes on salaries, which more loosely resemble revenues rather than profits. Income or profits tend to fluctuate more than revenue from year to year.
To help smooth things out, corporations can carry back losses, or apply losses to offset profits, up to two years. They also can do the same by carrying losses up to 20 years into the future. These options aren’t available to individuals.
Like individuals, corporations also enjoy various deductions, credits and other breaks they can use to lower their tax bills. For multinationals, the big one is a deferral of income earned abroad. Of the $154 billion in total tax breaks taken by corporations in 2014, delayed taxation on foreign income accounted for $83 billion, according to the Congressional Research Service.
ON Semiconductor attributed its near-zero tax rate to “our domestic tax losses and tax-rate differential in foreign subsidiaries,” as management stated in its 2014 annual report. The company has deferred taxes on roughly $1.78 billion of earnings from foreign subsidiaries.
“We have sufficient influence to control the distribution of such earnings and have determined that substantially all such earnings have been reinvested indefinitely,” the company continued. “We estimate that repatriation of these foreign earnings would generate additional taxes of approximately $178.7 million after . . . utilization of our available net operating loss carryforwards and foreign tax credits.”
It’s not necessarily a bad strategy. Some large corporations leave their profits in foreign subsidiaries for decades, plowing it back to expand operations in those nations. But there is an impact on domestic expansion and jobs. “This is thought to hurt U.S. investments,” said Mark Luscombe, principal senior tax analyst at Wolters Kluwer Tax & Accounting U.S.
That’s why the federal government offered a tax “holiday” a decage ago, allowing corporations to repatriate money at reduced tax rates. Businesses responded by bringing home more than $300 billion and paying taxes at rates around 5 percent. Was it a smart move? Not everyone thinks so.
“Corporations returned $312 billion in qualified repatriation dollars to the United States and avoided an estimated $3.3 billion in tax payments, but the growth in American jobs and investments that was supposed to follow did not occur,” stated a Senate majority report in 2011.
If corporate CEOs come to view tax holidays as anything but one-time events, they could be tempted to park even more money in foreign operations, warned the Center on Budget and Policy Priorities.
U.S. multinationals repatriated a hefty $300 billion in 2014, perhaps motivated by a strong dollar that effectively reduces the value of assets held in other nations, But U.S. corporations still hold more than $2.1 trillion abroad, Credit Suisse said in a report quoted recently in The Wall Street Journal.
Most businesses unaffected
Only 6 percent of businesses pay taxes as corporations, according to the Congressional Research Service. The rest are organized as S corporations, partnerships and sole proprietorships, with income paid at personal rates. Those 6 percent include the biggest and most globalized entities and the ones whose shares trade in the stock market.
That said, individuals also enjoy a lot of tax breaks, from the mortgage-interest deduction and retirement-plan incentives to various credits for low-income workers.
“Individual tax expenditures result in nearly eight times the revenue loss to the federal government relative to corporate tax expenditures,” wrote Mark Keightley and Molly Sherlock, authors of the Congressional Research Service report.
The revenue raised from individual income and payroll taxes also was nearly eight times larger last year compared to that collected on corporate income.
With governments chronically in search of revenue, proposals surface occasionally to restructure the corporate income tax, though Luscombe doesn’t see federal tax reform happening this year or next. “There’s neither the political will nor the compromise to achieve it,” he said.
But when and if income-tax reform does happens, Luscombe predicts reform will occur on the corporate-tax side before it materializes for individual taxes. The two main political parties have a different vision for this, he added: Republicans seek to do it as a revenue-neutral undertaking while Democrats, led by the White House, would like to generate more taxes in the process.
Reform options include reducing corporate breaks, cutting the tax rate, subjecting large partnerships and S corporations to corporate taxation, taxing only the domestic income earned by U.S. firms and better integrating the corporate and individual systems to avoid double taxation. The top rate for individuals receiving dividends and capital gains, when coupled with the corporate income-tax rate, can exceed 50 percent, the Tax Foundation contends.
One special type of corporation already can avoid double taxation by not paying it at the corporate level. This is firms organized as real estate investment trusts or REITs. Arizona is home to several, including Healthcare Trust of America, Spirit Realty Capital and Store Capital.
Reach the reporter at email@example.com or 602-444-8616.
Taxes for Arizona companies
The corporate tax rates paid by Arizona’s largest companies vary. Here are examples from 10 of the state’s most valuable firms, showing total income-tax provisions divided by pretax income in each of the past three fiscal years. Taxes often vary by industry, with retailers and financial firms often paying higher rates than manufacturers, technology and mining/energy companies. Total taxes include those to federal, state and foreign entities.
COMPANY 2013 TAX RATE 2013 TAXES PAID 2014 TAX RATE 2014 TAXES PAID
Freeport-McMoRan 30 percent $1.48 billion NMF $324 million
Republic Services 30.8 percent $262 million 38.1 percent $337 million
Microchip Technology 16.3 percent $25 million 8.6 percent $43 million
First Solar 6.7 percent $25 million 6.9 percent $30 million
Pinnacle West Capital 34.4 percent $231 million 34.2 percent $221 million
Avnet 18.1 percent $99 million 22.2 percent $156 million
Amerco 35.2 percent $144 million 36.3 percent $195 million
Sprouts Farmers Market 38.9 percent $33 million 38.1 percent $66 million
ON Semiconductor 9.6 percent $16 million NMF $0 million*
Swift Transportation 39.4 percent $101 million 35.7 percent $89 million
Note: NMF means “not meaningful” because the company incurred a loss that year and a tax rate cannot be calculated. Some figures are rounded.
Corporate taxes and government receipts
The slice of federal revenue from corporate income taxes has declined gradually over the decades. Here are percentages derived from key tax sources.
YEAR INDIVIDUAL CORPORATE SOCIAL SECURITY/ EXCISE/OTHER TOTAL
INCOME INCOME RETIREMENT TAXES REVENUE
1950 40 percent 26.5 percent 11 percent 22.6 percent $39 billion
1960 44 percent 23.2 percent 15.9 percent 16.9 percent $93 billion
1970 46.9 percent 17 percent 23 percent 13 percent $193 billion
1980 47.2 percent 12.5 percent 30.5 percent 9.8 percent $517 billion
1990 45.3 percent 9.1 percent 36.8 percent 8.9 percent $1.03 trillion
2000 49.6 percent 10.2 percent 32.2 percent 7.9 percent $2.03 trillion
2010 41.6 percent 8.8 percent 40 percent 9.6 percent $2.16 trillion
2014 46.1 percent 10.6 percent 33.9 percent 9.3 percent $3.02 trillion
Source: White House Office of Management and Budget
Note: Excise and other taxes include levies on alcohol, tobacco and estates and Federal Reserve earnings.