Institute on Taxation and Economic Policy 1311 L Street, NW Washington, DC

Thursday, October 19, 2000 Contact: Bob McIntyre (202) 737-4315

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Many of the country's biggest corporations are once again paying little or nothing in federal income taxes, according to a study released today by the Institute on Taxation and Economic Policy, which collaborated on a number of widely-publicized analyses of corporate taxes in the 1980s.

ITEP's new report examines the U.S. profits and federal income taxes of 250 of the nation's largest and most profitable corporations over the 1996-98 period. Although big corporations ostensibly are supposed to pay 35 percent of their profits in taxes, the 250 companies in ITEP's survey paid only 20.1 percent in 1998. That was down from 22.9 percent in 1996, and far below the 26.5 percent that a similar group of large companies paid back in 1988, soon after passage of the loophole-closing 1986 Tax Reform Act.

"With significant help from Congress, corporations appear to be finding ways around the tax reforms adopted in 1986," said Robert S. McIntyre, a principal author of both the new study and previous corporate tax studies in the 1980s. "We hope our findings will encourage lawmakers to reexamine this important area of taxation."

The study's central findings include:

• Forty-one companies actually paid less than zero in federal income taxes in at least one year from 1996 to 1998. In those tax-free years, the 41 companies reported a total of $25.8 billion in pretax U.S. profits. But rather than paying $9 billion in federal income taxes at the 35 percent rate, these companies enjoyed so many excess tax breaks that they received $3.2 billion in rebate checks from the U.S. Treasury. Just one company, Texaco, reported $3.4 billion in U.S. profits and $304 million in tax rebates over the three years.
• In 1998, twenty-four corporations got tax rebates. These 24 companies--almost one out of ten of the companies in the study--reported U.S. profits before taxes in 1998 of $12.0 billion, yet received tax rebates totaling $1.3 billion. The list of big-name companies getting tax rebates in 1998 included, among others, Texaco, Chevron, CSX, Pepsico, Pfizer, J.P. Morgan, Goodyear, Enron, General Motors, Phillips Petroleum and Northrop Grumman.
• A hundred and thirty-three of the 250 companies paid effective tax rates of less than half the 35 percent rate in at least one of the three years (and many did it more than once). In the years that these 133 corporations paid such low tax rates, they paid a mere 8.5 percent of their $209 billion in U.S. profits in federal income taxes.
• Over the 1996-98 period, petroleum was the lowest-taxed industry in America, with an effective tax rate of only 12.3 percent. In 1998, the tax rate on the 12 big oil companies in the study fell to only 5.7 percent. Only one industry, publishing, paid an effective tax rate of more than 30 percent.

The Size of the Tax Breaks

Had all 250 companies paid the full 35 percent corporate tax rate on their $735 billionin pretax U.S. profits from 1996 to 1998, their federal income taxes would have totaled $257billion. But instead, tax breaks for the 250 companies lowered their taxes by $26.9 billionin 1996, $31.8 billion in 1997 and $39.3 billion in 1998, for a total of $98 billion in tax savings over the three years.

• Almost half of those tax-break dollars went to just 25 companies, each getting more than a billion dollars in tax breaks.
• General Electric topped the list, with $6.9 billion in tax breaks over three years.

Widely Varying Tax Rates by Company and Industry

Effective tax rates varied dramatically both among companies and industries.

• Over the three-year period, individual company tax rates ranged from a low of-9.9 percent on Goodyear to a high of just over 35 percent on Winn-Dixie and Paccar.
• Industry tax rates ranged from the 12.3 percent paid by oil companies up to a 31.6 percent rate paid by publishers. Besides oil, other very low tax industries--which paid less than half the statutory tax rate over the entire 1996-98 period--included electronic and electrical equipment manufacturers (13.1 percent), paper companies (13.9 percent), transportation companies (14.1 percent) and auto companies (17.1 percent).
• Competitors in various industries also faced sharply varying effective tax rates. For example, Maytag and General Electric both make kitchen appliances. But Maytag paid 35 percent of its profits in taxes from 1996 to 1998, while GE paid only 8.1 percent. Likewise, Abbot Laboratories and Pfizer are both in the drug business, but the former paid almost 29 percent of its profits in taxes from 1996 to 1998, while the latter paid only 3.1 percent.

What Happened to the Alternative Minimum Tax?

The corporate Alternative Minimum Tax was adopted in 1986 to reduce these discrepancies and make sure that every company with substantial profits pays some significant tax. But legislation adopted in 1993 and 1997 has left the alternative corporate tax only a shell of its former self.

How Companies Avoided Taxes

Companies used a variety of means to lower their federal income taxes, including accelerated depreciation write-offs, tax credits for things like research and oil drilling, and tax breaks for doing business in Puerto Rico. GE continues to slash its tax bills every year through its leasing activities, where it essentially buys tax breaks from companies that have more than they can use.

One fast-growing tax break that had a very significant effect in lowering taxes involved stock options. When stock options are exercised, corporations can take a tax deduction for the difference between what employees pay for the stock and what it's worth--even though in reporting profits to shareholders, companies don't treat stock-option transactions as business expenses. ITEP found that 233 of the 250 companies lowered their taxes from stock options, by a total of $25.8 billion over the three years. Microsoft led the pack with $2.7 billion in stock-option tax benefits--reflecting the fact that stock option tax benefits are dependent on how much a company's stock has gone up in value, and thus the tax savings were especially large in high-tech industries whose market valuations zoomed during the three-year period.

"The general public has a right to be concerned about how their taxes and services are affected by this resurgence in corporate tax avoidance," said McIntyre. "Companies that see their competitors paying much less in taxes than they do have a legitimate beef, too. And anyone who worries about our economy's long-term growth has to wonder why the tax code is being used to favor some industries and some kinds of investments over others, rather than letting market forces decide."

The Institute on Taxation and Economic Policy is a non-profit tax policy research organization. This study was funded by grants from the Ford Foundation, The Shefa Fund, Stanley K. Sheinbaum, Tides Foundation and Working Assets Funding Service. The full 64-page report, Corporate Income Taxes in the 1990s, is available in PDF format atwww.itepnet.org. Printed copies can be ordered by calling ITEP at 202-737-4315.