The Gap Between Statutory and Real Corporate Tax Rates
How they do it
There are myriad reasons why particular corporations paid low taxes. The key major tax-lowering items revealed in the companies' annual reports - plus some that are not disclosed - include:
Accelerated depreciation. The tax laws generally allow companies to write off their capital investments considerably faster than the assets actually wear out. This "accelerated depreciation" is technically a tax deferral, but so long as a company continues to invest, the tax deferral tends to be indefinite. In 2002 and again in 2003, Congress passed and President Bush signed new business tax breaks totaling $175 billion over the 2002-2004 period. These new tax subsidies centered on a huge expansion in accelerated depreciation, coupled with rules making it easier for companies with an excess of tax breaks to get tax rebate checks from the Treasury by applying their excess tax deductions to earlier years and still other new tax subsidies.
Atop the list of accelerated depreciation beneficiaries are SBC Communications, with $5.8 billion in accelerated depreciation tax savings, Verizon (with $4.5 billion), Devon Energy ($4.4 billion), ExxonMobil ($2.9 billion) and Wachovia ($2.8 billion).
Stock options. Most big corporations give their executives and other employees options to buy the company's stock at a favorable price in the future. When those options are exercised, corporations can take a tax deduction for the difference between what the employees pay for the stock and what it is worth. But in reporting profits to shareholders, companies do not treat the effects of stock-option transactions as business expenses - based on the arguable theory that issuing stock at a discount doesn't really reduce profits because the market value of a company's stock often has only a very attenuated relation to earnings.
The corporate tax benefits from stock option write-offs are quite large. Of the 275 corporations, 269 received stock-option tax benefits over the 2001-2003 period, which lowered their taxes by a total of $32 billion over three years. The benefits ranged from as high as $5 billion for Microsoft over the three years to tiny amounts for a few companies.
Overall, tax benefits from stock options cut the average effective corporate tax rate for the 275 companies by 3 percentage points over the 2001-2003 period.
The benefits declined after 2001, however, falling from $13 billion in 2001 to about $9.5 billion a year in 2002 and 2003. The tax-rate effects of stock options are likely to continue to decline as accounting standards are changed to reduce the disparity between the book and tax treatment of options.
Tax credits. The federal tax code also provides tax credits for companies that engage in certain activities - for example, research (on top of allowing immediate expensing of research investments), certain kinds of oil drilling, exporting, hiring low-wage workers, affordable housing and supposedly enhanced coal (alternative fuel). As credits, these directly reduce a company's taxes.
Some credits have unexpected beneficiaries. For instance, Bank of America cut its taxes by $580 million over the 2001-2003 period by purchasing affordable-housing tax credits. Clorox saved $36 million, Kimberly-Clark, $115 million, and Illinois Tool Works, an unspecified amount, from those same credits. Bank of New York obtained $100 million in alternative fuel credits over that period. Marriot International operates four coal-based synthetic fuel facilities solely for the tax benefits, which cut Marriot's taxes by $233 million in 2003 and $159 million in 2002.
Offshore tax sheltering. Over the past decade, corporations and their accounting firms have become increasingly aggressive in seeking ways to shift their profits, on paper, into offshore tax havens, in order to avoid their tax obligations. Some companies have gone so far as to renounce their U.S. "citizenship" and reincorporate in Bermuda or other tax-haven countries to facilitate tax sheltering activity.
Not surprisingly, corporations do not explicitly disclose their abusive tax sheltering in their annual reports. For example, Wachovia's extensive schemes to shelter its U.S. profits from tax are cryptically described in the notes to its annual reports merely as "leasing." It took extensive digging by PBS's Frontline researchers to discover that Wachovia's tax shelter involved pretending to own and lease back municipal assets in Germany, such as sewers and rail tracks, a practice heavily promoted by some accounting firms. Other tax shelter devices, such as abuses of "transfer pricing," also go unspecified in corporate annual reports. Nevertheless, corporate offshore tax sheltering is estimated to cost the U.S. Treasury anywhere from $30 billion to $70 billion a year, and presumably the effects of these shelters are reflected in the bottom-line results of what companies pay in tax.
