A comprehensive new study finds that many consistently profitable companies are paying little to no corporate income taxes on those profits. Out of 265 Fortune 500 companies examined, 68 managed to pay no state income tax in at least one out of the last three years, despite making almost $117 billion in pretax profits in those no-tax years.
These are among the findings in “Corporate Tax Dodging In the Fifty States, 2008-2010,” by the Institute on Taxation and Economic Policy (ITEP) and Citizens for Tax Justice (CTJ). They find that 20 companies, including the Oklahoma natural gas giant Chesapeake Energy, averaged a tax rate of zero or less during the 2008-2010 period.
State corporate tax revenues have been steadily declining for two decades. Matthew Gardner, Executive Director at the Institute on Taxation and Economic Policy and the report’s co-author, identifies three chief causes. First, state lawmakers continue to enact tax subsidies requested by corporations, most of which don’t produce the promised economic results. Second, federal tax breaks enacted in the past decade further reduce state corporate income tax revenues since states generally accept corporations’ federal tax numbers. Third is that multi-state corporations devote money and legal firepower to coming up with tax avoidance schemes.
Of the Oklahoma-based corporations examined in the report, Chesapeake Energy paid an effective tax rate of -2.1 percent from 2008-2010, Devon Energy paid 0.6 percent, Williams paid 1.0 percent, and OneOK paid 1.1 percent. Oklahoma ‘s corporate income tax rate is 6 percent.
It is not clear exactly how much Oklahoma might be losing due to tax avoidance strategies by both Oklahoma-based and out-of-state corporations. All figures in the report are aggregate for taxes paid to all U.S. states by each corporation, and it is not possible from available data to determine specific tax amounts paid by corporations to individual states.
The report makes three recommendations for states to help prevent corporate tax avoidance:
- Combined reporting, which effectively treats a parent company and its subsidiaries as a single corporation for state tax purposes. It eliminates most of the advantage of shifting profits into Delaware, Nevada, and other tax haven states.
- Decouple from federal tax loopholes, such as bonus depreciation, and other provisions which reduce the amount of taxable income corporations have to claim in their state tax filings. (Oklahoma already does this in most cases.)
- Increase disclosure, transparency and accountability. Corporations should be required to publicly report their in-state profits, as well as any subsidies or loopholes they are exploiting each year.
Oklahoma should examine all of these strategies to repair a tax base that is increasingly full of holes. It would also help to reduce distortions in the economy and ensure a level playing field for all businesses, not just large, multi-state corporations that have the resources to pursue tax avoidance strategies.
In particular, we should seriously consider adopting combined reporting, which has already been implemented in a majority of states with corporate income taxes, including Kansas and Texas. At a time when the state is experiencing serious budget shortfalls and cutting vital services, allowing tax havens to continue is a disservice to all Oklahoma taxpayers.