A pro-business lobbying group is disputing the claims in a recently released report that found some of the most profitable corporations avoiding billions of dollars in state taxes.
The advocacy groups Citizens for Tax Justice and a related organization, the Institute on Taxation and Economic Policy, released a study Wednesday that found 68 of the most consistently profitable Fortune 500 companies paid no state corporate income taxes in at least one of the last three years, and 20 of the companies averaged a tax rate of zero or less from 2008-2010 (see Corporate Tax Avoidance Cost States $42 Billion).
A rebuttal Friday by the Council On State Taxation took issue with the CTJ report, pointing out that it looked at only state and local corporate income taxes.
“The study does not include franchise, net worth, capital stock, gross receipts, excise or other similar business taxes,” said COST. “Perhaps more importantly, the study also excludes all property taxes, sales taxes, and payroll taxes paid by companies during those three years.”
COST pointed out that in fiscal year 2010, businesses paid $619 billion in total state and local taxes. Of that amount, total state and local corporate income taxes were $44.1 billion.
“Thus, the taxes CTJ chose not to mention are 14 times larger than the taxes CTJ chose to include in the study,” said COST. “In other words, the CTJ study covers only about 7 percent of total state and local business taxes.”
COST argued that the CTJ study ignores the tremendous growth in recent years in the use of limited liability companies and other pass-through entities. “Most states did not recognize LLCs until the mid-90s. Since then, their use has grown exponentially,” said the group. “Tax revenues from businesses operating as LLCs are reflected in increased personal income tax revenues.”
COST also contended that the study “manipulated … audited book earnings to adjust for accounting methods the authors disagree with—despite the fact that companies are required to follow such accounting methods under Generally Accepted Accounting Principles (GAAP). These adjustments, by their very nature, will always increase the book income measure.”
COST argued that the CTJ report made the assumption that the company’s annual report information on state taxes equals the state income taxes actually “paid” in any given state or even in total for that year.
“The financial provision for state tax expense, under GAAP, includes the results of prior-year audit settlements occurring in the current year, other deferred tax expenses, and any other items from prior years that impact the current financial statement,” said the rebuttal. “Accordingly, comparing the state income tax provision on the financial statements to a percentage of ‘U.S. Profits’ as determined by the authors is a comparison of apples and oranges.”
COST argued that the CTJ study also ignored the impact of net operating loss carryovers. “When a corporation incurs a loss, state and federal tax laws allow that company to offset that loss against future (and past) earnings,” said COST. “NOL provisions are designed to avoid penalizing companies for the artificial difference between the annual tax reporting cycle and the normal business cycle. Thus a significant loss in one year can impact the amount of tax a company pays in both prior and subsequent years.”
COST also pointed out that the three years covered by the study coincided with the worst recession since World War II. “One would expect the corporate income tax to behave precisely as designed during periods of economic downturn—if income is down, so are income taxes,” said COST. “Not coincidentally, the last time CTJ issued a similar report was in 2005, addressing the years 2001-2003, precisely matching our nation’s previous recession.”
COST also claimed that the CTJ study’s findings were “skewed” by the fact that seven states—Michigan, Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming—did not impose a state corporate income tax during the years in question.
“However, four of those states—Ohio, Michigan, Texas and Washington—imposed a version of a gross receipts tax that was, in effect, a stand-in for a state corporate income tax,” COST pointed out. “None of the revenues collected under those taxes are considered under the study. Further, even among states with a corporate income tax, such taxes are imposed on vastly different entity and income bases. Thus, to extrapolate an ‘average’ tax rate from an aggregate number in company financial reports is meaningless.”