Corporate Tax Breaks: Are They Worth It?

A LOOK AT CORPORATE TAXES AT THE FEDERAL AND STATE LEVEL

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FEDERAL LEVEL

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HOW THEY GATHERED THEIR DATA 

Fortune 500 - the annual list compiled and published by Fortune magazine that ranks 500 of the largest US corporations by total revenue.



A look at corporate profits and taxes over a 5-year period (2008-2012)

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Analysis excluded any companies that had even one unprofitable year over the 5 years of the study.

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Gathered tax information from SECC filings 4

WHAT DO WE KNOW ABOUT CORPORATE INCOME TAXES? 

Their percentage of both federal and state revenues has been declining



What corporations pay varies greatly – depending on deductions, credits and other incentives meant to stimulate the economy and increase employment



Different categories of corporations pay much less in taxes than other categories

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CORPORATE SHARE OF FEDERAL REVENUE 

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HOW IS “TAXABLE INCOME” DETERMINED? 

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WHAT IS AN EFFECTIVE TAX RATE? Taxes paid as a percentage of income (individuals) or profit (corporations) Income

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$50,000

Deductions

-$5,000

Taxable Income

$45,000

Tax (x 2.8%)

$1,296

Less Credits

-$1,000

Taxes Paid

$296

Effective Tax Rate ($296/$50,000)

.59%

THE EFFECTIVE TAX RATE OF 288 FORTUNE 500 COMPANIES Over the 5-Year Period 2008 - 2012

More than 30% 62

No taxes 26 Less than 10% 67

1.75% - 30% 107 10% - 17.5% 26 Source: Citizens for Tax Justice and Institute on Taxation and Economic Policy, The Sorry State of Corporate Taxes: What Fortune 500 Firms Pay (or Don’t Pay) in the USA and What They Paid Abroad, February 2014

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CORPORATIONS WITH LOWEST EFFECTIVE TAX RATES Company

Profits

Taxes

Effective Tax Rate

$1.7 billion

-$575 million

-33.0%

$7 billion

-$1.2 billion

-16.7%

NiSource

$2.5 billion

-$366 million

-13.6%

Wisconsin Energy

$3.2 billion

-$436 million

-13.5%

General Electric

$27.5 billion

-$3 billion

-11.1%

Pepco Holdings PG&E Corp.

How does a company end up with negative taxes? • Tax breaks that exceed taxes due • Can be “carried back” to prior years and result in a cash refund for taxes paid in the past 11

CORPORATIONS WITH $10 BILLION OR MORE IN PROFIT AND NO NEGATIVE TAXES

Company

Profit

Tax

Verizon

$30.2 billion

-$535 million

General Electric

$27.5 billion

-$3 billion

Boeing

$20.5 billion

-$202 million

NextEra Energy

$11.4 billion

-$178 million

$10 billion

-$577 million

American Electric Power

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EFFECTIVE TAX RATE VARIES ACROSS INDUSTRIES Industry



All Industries

Effective Tax Rate 19.4%

3 Lowest: Utilities, gas and electric

2.9%

Industrial Machinery

4.3%

Telecommunications

9.8%

3 Highest:

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Publishing, printing

26.4%

Health care

29.6%

Retail & wholesale trade

29.6%

HOW DOES THIS HAPPEN? 

Offshore tax sheltering

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Accelerated depreciation

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Stock options

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Industry-specific tax breaks

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RECOMMENDATIONS FOR FEDERAL REFORM 

Repeal the rule allowing American multinational corporations to indefinitely defer their US taxes on offshore profits – eliminates incentive to shift profits and jobs overseas



Limit ability use executive stock options to reduce taxes



Repeal accelerated depreciation

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Reinstate a corporate Alternative Minimum Tax

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Require more complete and transparent geographicspecific public disclosure than SEC currently mandates 15

ARIZONA’S CORPORATE INCOME TAXES 

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STATE REVENUES HAVE NOT RECOVERED In Billions $10.15

$9.62

$9.75 $9.11

$8.76

$8.71

$8.93

$9.16

$9.40

$8.36

$8.05 $6.97 $6.2

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016*

*Estimates Source: Joint Legislative Budget Committee Staff, Finance Advisory Committee presentation, 1-21-16

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2017*

2018*

2019*

CORPORATE INCOME TAX PIECE OF REVENUE PIE IS SHRINKING FISCAL YEAR 2006

FISCAL YEAR 2016

Other $0.3 4%

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Other $0.9 10% Individual $2.9 37%

Sales $3.9 49%

Sales $4.3 45%

Corporate $0.8 10%

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Individual $3.7 39%

Corporate $0.6 6%

Reason # 1: CORPORATE INCOME TAX RATE IS BEING REDUCED

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Tax Year

Tax Rate

2001

6.968%

2014

6.5%

2015

6.0%

2016

5.5%

2017

4.9%

Reason #2: CORPORATE TAX CREDITS ARE INCREASING 

24 tax credits available



FY 13: 

466* claims for tax credits



$129 million used to reduce tax bill

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$3.7 million refunded

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$1.1 billion carried forward

*Preliminary number – previous year was 812

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ARIZONA CORPORATE TAX CREDITS Credit

No. of Claims

Used

Carryforward

Solar Energy

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$130 million

$73,000

Student Tuition Organizations

95

$22.5 million

$4.1 million

Student Tuition Organizations – Disabled/Displaced Students

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$368,600

$136,000

Employing National Guard

4

$9,000

$950

Employing TANF recipient

6

$111,500

$90,800

Enterprise Zone

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$1.8 million

$2.8 million

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ARIZONA CORPORATE TAX CREDITS Credit

Used

Carryforward

Motion Picture

3

$831,500

$15,300

New Employment Credit

14

$4.7 million

$379,500

Pollution control Device

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$1.7 million

$4.3 million

Renewable Energy Production

7

$8.6 million

$13.2 million

239

$87.4 million $3.7 million refunded

$938 million

Research & Development

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No. of Claims

6 CREDITS HAD NO CLAIMS FILED

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Agricultural Pollution Control Equipment

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Qualified Facilities

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Solar Hot Water Plumbing Stub Outs & Electric Vehicle Recharge

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Solar Liquid Fuel Research & Development

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Water Conservation Plumbing Stub Outs

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FOR 7 CREDITS, NO DATA CAN BE RELEASED 

Department of Revenue is prohibited from releasing information that identifies a specific taxpayer

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When there are so few claims filed that a taxpayer’s identity might be discerned, tax credit data is “Not Releasable”

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CORPORATE INCOME TAX CREDIT REPORTING

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CORPORATE INCOME TAX CREDITS 

Latest data not releaseable: 

Environmental Technology Facility



Military Reuse Zone

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Qualified Health Insurance Plans Credit

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Renewable Energy Industry-Investment an Employment

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Additional Research & Development for University Research

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School site donation

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Taxes paid for coal consumed in generating electrical plant

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Millions

CORPORATIONS TAX CREDIT CARRYFORWARD DWARFS ACTUAL CREDITS USED $1,200

 $1,000

$800

$600

$773

$827

$863

$917

141

108

75

55

2006

2007

2008

2009

$1,065

$1,018

$970

$970

92

92

121

133

2010

2011

2012

2013

$772 $400

$200

$0

67 2005

Used

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Carry forward

2011 “JOBS BILL”   

Initial impact to General Fund $38.2 million (FY 12) After complete phase-in $538 million (FY 18) Includes significant tax cuts without any requirement for job creation: 

  

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Property tax cut Capital gains tax from small businesses Corporate income tax rate cut Tax break for multistate corporations

$17.4 million $13.6 million $269.6 million $84 million

TAX CUTS IN THE MIDDLE OF THE GREAT RECESSION?

YES Fiscal Year

2012

2013

2014

2015

2016

2017

2018

2019

2020

$6.7 MILLION

How 2 tax bills will cost the general fund nearly half a billion dollars by 2020

2011 - Jobs Bill

2012 - Employment Incentives, Business Tax Credits, and Insurance Premium Tax Rate Cut

Source: Joint Legislative Budget Committee staff, Tax Handbook, 2015

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$498.5 MILLION

2011 “JOBS BILL” 

Job creation incentive 

$3,000 per year for 3 years for every next job created



2016 - Changed wage requirement

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2016 – reduced % of insurance premium paid from 80% to 65%

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$50.9 million

2012 EMPLOYMENT INCENTIVES BILL 

Phased in reduction of long-term capital gains

$69 million

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Extend net operating loss carryforward from 5 to 20 years

$12 million

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New tax credit for capital investments

$20 million

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Eliminate cap on # of new employees eligible for new employee tax credit*

$5.4 million

*2016 legislature also made changes to this credit 31

COMMERCE AUTHORITY

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Administers several funds meant to attract and retain businesses, encourage innovation, and boost the economy

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Oversees several of the tax credit programs

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COMMERCE AUTHORITY’S 5-YEAR GOALS 

Create 75,000 higher-wage jobs

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Increase average wages of jobs created

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Increase capital investment by $6 billion between FY 13 and 17

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MAJOR FINDINGS 

ACA can more clearly present its impact on Arizona’s economic development

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The Arizona Competes Fund grand selection processes should be formalized and monitoring can be improved

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FROM THE AUDIT ACA is using commitments to create jobs and make capital investments rather than actual jobs created or investments made.

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From ACA’s response to audit finding: “The Authority believes that the Authority’s stakeholders are familiar with the industry custom of reporting jobs and capital investment based on company projections. For example, in reporting on projects announced by Authority clients, the local press regularly reports the clients’ jobs and capital investment projections for those projects. Nevertheless, the Authority will, wherever applicable in its reporting, make clear whether jobs and capital investment figures reported are based on projections or actual activity.” 36

AUDITOR GENERAL’S REPORT ARIZONA COMMERCE AUTHORITY Include in its annual Arizona Competes report:

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1.

2.

Required information, such as jobs committed and created, for each recipient Median wage of the jobs created by each recipient

Enhance its Arizona Competes grant award practice by:

 1. 2. 3.

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Development and implementing comprehensive written procedures Training staff on procedures/ensure that they are followed Development procedures detailing documentation to be maintained

AUDITOR GENERAL’S REPORT ARIZONA COMMERCE AUTHORITY 

Improve its monitoring of Arizona Competes grants by developing and implementing written policies and procedures for verifying milestones and/or outcomes 1. 2.

3. 4.

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Specify what the milestone and/or outcome information is that recipients should report Indicate how information should be verified Identify what information should be documented in files Specify that grant payments will not be made until verification process is completed and documented

AUDITOR GENERAL’S REPORT ARIZONA COMMERCE AUTHORITY 

Summarize Arizona’s total economic development investment costs and the benefits to the state

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Compare actual job creation and capital investment outcomes to those announced – and keep it updated over time

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JOB CREATION AND CAPITAL INVESTMENT 

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IS ARIZONA A HIGH TAX STATE? WOULD REDUCING TAXES ATTRACT MORE BUSINESSES Taxes Per $100 of Personal Income (2012 data) Tax

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2012

2000

Out of

Corporate

31st

21st

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Individual

40th

38th

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Property

28th

22nd

50

General Sales

6th

7th

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Selective Sales

42nd

39th

50

Other Taxes

44th

47th

50

Total Taxes

35th

27th

50

Fees/Misc.

38th

42nd

50

Total

39th

37th

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HOW ARIZONA COMPARES ON DIFFERENT TAXES Taxes Per $100 of Personal Income (2012 data) State and Local Revenues Highest Lowest Tax

AZ

Corporate

$0.28

40.36

$1.85

Alaska

$0.08

Ohio

Individual

$1.32

$2.28

$4.66

New York

$0.07

Tenn.

Property

$2.92

$3.30

$5.41

New Jersey

$1.49

Alabama

General Sales

$3.67

$2.33

$4.77

Hawaii

$0.58

Alaska

Selective Sales

$0.92

$1.20

$2.32

Vermont

$0.56

Wyoming

Other Taxes

$0.28

$0.63

$16.44

Alaska

$0.16

Georgia

Total Taxes

49.47

$10.28

$24.21

Alaska

$7.70

South Dakota

Fees/Misc.

$4.21

44.63

$14.92

Alaska

$2.26

Conn.

Total

$13.68

$14.91

$39.14

Alaska

$11.43

South Dakota

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US Avg

State

State

ONLY ONE-FOURTH OF ARIZONA CORPORATIONS OWED MORE THAN THE $50 MINIMUM IN 2011  $50-$5,000

$5,000-$100,000

$50 minimum

$100,000-$1 million Over $1 million

NOTE: Amounts shown are before tax credits. Source: Arizona Department of Revenue, Corporate Taxpayer by Size of Tax Liability Tax Year 2011

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THE FORTUNE 500 STUDY COMPANIES HEADQUARTERED IN ARIZONA Five Year Totals 2008-2012 Company Insight Enterprises

PetSmart

Apollo Group

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Profit

Tax

Rate

$314 million

$4 million

1.3%

$2 billion

$83 million

4.2%

$5.1 billion

$328 million

6.4%

RECOMMENDATIONS FOR STATE REFORM 

Include sunset dates for all tax credits



Gather meaningful data on all tax credits and special tax exemptions so policymakers can evaluate if they are doing what they were intended to do



Tax credits and tax cuts designed to create new jobs should be measurable

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Children’s Action Alliance

Karen McLaughlin Director of Budget and Research

602-266-0707 ext. 207

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