Corporate Tax Breaks: Are They Worth It? A LOOK AT CORPORATE TAXES AT THE FEDERAL AND STATE LEVEL

Transcription

1 Corporate Tax Breaks: Are They Worth It? A LOOK AT CORPORATE TAXES AT THE FEDERAL AND STATE LEVEL 1

2 2 FEDERAL LEVEL

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4 HOW THEY GATHERED THEIR DATA Fortune 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 ( ) Analysis excluded any companies that had even one unprofitable year over the 5 years of the study. Gathered tax information from SECC filings 4

5 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 5

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7 CORPORATE SHARE OF FEDERAL REVENUE 7

8 HOW IS TAXABLE INCOME DETERMINED? 8

9 WHAT IS AN EFFECTIVE TAX RATE? Taxes paid as a percentage of income (individuals) or profit (corporations) Income $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% 9

10 THE EFFECTIVE TAX RATE OF 288 FORTUNE 500 COMPANIES Over the 5-Year Period More than 30% % - 30% 107 No taxes 26 Less than 10% 67 10% % 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

11 CORPORATIONS WITH LOWEST EFFECTIVE TAX RATES Company Profits Taxes Effective Tax Rate Pepco Holdings $1.7 billion -$575 million -33.0% PG&E Corp. $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% 11 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

12 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 American Electric Power $10 billion -$577 million 12

13 EFFECTIVE TAX RATE VARIES ACROSS INDUSTRIES Industry Effective Tax Rate All Industries 19.4% 3 Lowest: Utilities, gas and electric 2.9% Industrial Machinery 4.3% Telecommunications 9.8% 3 Highest: Publishing, printing 26.4% Health care 29.6% Retail & wholesale trade 29.6% 13

14 HOW DOES THIS HAPPEN? Offshore tax sheltering Accelerated depreciation Stock options Industry-specific tax breaks 14

15 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 Reinstate a corporate Alternative Minimum Tax Require more complete and transparent geographicspecific public disclosure than SEC currently mandates 15

16 ARIZONA S CORPORATE INCOME TAXES 16

17 STATE REVENUES HAVE NOT RECOVERED In Billions $9.62 $8.76 $8.05 $8.71 $9.11 $8.36 $8.93 $9.16 $9.40 $9.75 $10.15 $6.97 $ * 2017* 2018* 2019* *Estimates Source: Joint Legislative Budget Committee Staff, Finance Advisory Committee presentation,

18 CORPORATE INCOME TAX PIECE OF REVENUE PIE IS SHRINKING FISCAL YEAR 2006 FISCAL YEAR 2016 Other $0.3 4% Other $0.9 10% Individual $2.9 37% Individual $3.7 39% Sales $3.9 49% Sales $4.3 45% Corporate $0.8 10% Corporate $0.6 6% 18

19 Reason # 1: CORPORATE INCOME TAX RATE IS BEING REDUCED Tax Year Tax Rate % % % % % 19

20 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 $3.7 million refunded $1.1 billion carried forward *Preliminary number previous year was

21 ARIZONA CORPORATE TAX CREDITS Credit No. of Claims Used Carryforward Solar Energy 11 $130 million $73,000 Student Tuition Organizations Student Tuition Organizations Disabled/Displaced Students 95 $22.5 million $4.1 million 13 $368,600 $136,000 Employing National Guard 4 $9,000 $950 Employing TANF recipient 6 $111,500 $90,800 Enterprise Zone 43 $1.8 million $2.8 million 21

22 ARIZONA CORPORATE TAX CREDITS Credit No. of Claims Used Carryforward Motion Picture 3 $831,500 $15,300 New Employment Credit 14 $4.7 million $379,500 Pollution control Device 17 $1.7 million $4.3 million Renewable Energy Production 7 $8.6 million $13.2 million Research & Development 239 $87.4 million $3.7 million refunded $938 million 22

23 6 CREDITS HAD NO CLAIMS FILED Agricultural Pollution Control Equipment Qualified Facilities Solar Hot Water Plumbing Stub Outs & Electric Vehicle Recharge Solar Liquid Fuel Research & Development Water Conservation Plumbing Stub Outs 23

24 FOR 7 CREDITS, NO DATA CAN BE RELEASED Department of Revenue is prohibited from releasing information that identifies a specific taxpayer When there are so few claims filed that a taxpayer s identity might be discerned, tax credit data is Not Releasable 24

25 CORPORATE INCOME TAX CREDIT REPORTING 25

26 CORPORATE INCOME TAX CREDITS Latest data not releaseable: Environmental Technology Facility Military Reuse Zone Qualified Health Insurance Plans Credit Renewable Energy Industry-Investment an Employment Additional Research & Development for University Research School site donation Taxes paid for coal consumed in generating electrical plant 26

27 Millions CORPORATIONS TAX CREDIT CARRYFORWARD DWARFS ACTUAL CREDITS USED $1,200 $1,000 $800 $600 $773 $827 $863 $917 $970 $970 $1,065 $1,018 $400 $772 $200 $ Used Carry forward 27

28 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: 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 28

29 TAX CUTS IN THE MIDDLE OF THE GREAT RECESSION? YES Fiscal Year $6.7 MILLION How 2 tax bills will cost the general fund nearly half a billion dollars by Jobs Bill Employment Incentives, Business Tax Credits, and Insurance Premium Tax Rate Cut Source: Joint Legislative Budget Committee staff, Tax Handbook, 2015 $498.5 MILLION 29

30 2011 JOBS BILL Job creation incentive $50.9 million $3,000 per year for 3 years for every next job created Changed wage requirement 2016 reduced % of insurance premium paid from 80% to 65% 30

31 2012 EMPLOYMENT INCENTIVES BILL Phased in reduction of long-term capital gains Extend net operating loss carryforward from 5 to 20 years New tax credit for capital investments Eliminate cap on # of new employees eligible for new employee tax credit* $69 million $12 million $20 million $5.4 million *2016 legislature also made changes to this credit 31

32 COMMERCE AUTHORITY Administers several funds meant to attract and retain businesses, encourage innovation, and boost the economy Oversees several of the tax credit programs 32

33 COMMERCE AUTHORITY S 5-YEAR GOALS Create 75,000 higher-wage jobs Increase average wages of jobs created Increase capital investment by $6 billion between FY 13 and 17 33

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35 MAJOR FINDINGS ACA can more clearly present its impact on Arizona s economic development The Arizona Competes Fund grand selection processes should be formalized and monitoring can be improved 35

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

37 AUDITOR GENERAL S REPORT ARIZONA COMMERCE AUTHORITY Include in its annual Arizona Competes report: 1. Required information, such as jobs committed and created, for each recipient 2. Median wage of the jobs created by each recipient Enhance its Arizona Competes grant award practice by: 1. Development and implementing comprehensive written procedures 2. Training staff on procedures/ensure that they are followed 3. Development procedures detailing documentation to be maintained 37

38 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. Specify what the milestone and/or outcome information is that recipients should report 2. Indicate how information should be verified 3. Identify what information should be documented in files 4. Specify that grant payments will not be made until verification process is completed and documented 38

39 AUDITOR GENERAL S REPORT ARIZONA COMMERCE AUTHORITY Summarize Arizona s total economic development investment costs and the benefits to the state Compare actual job creation and capital investment outcomes to those announced and keep it updated over time 39

40 JOB CREATION AND CAPITAL INVESTMENT 40

41 IS ARIZONA A HIGH TAX STATE? WOULD REDUCING TAXES ATTRACT MORE BUSINESSES Taxes Per $100 of Personal Income (2012 data) Tax Out of Corporate 31 st 21 st 46 Individual 40 th 38 th 43 Property 28 th 22 nd 50 General Sales 6 th 7 th 46 Selective Sales 42 nd 39 th 50 Other Taxes 44 th 47 th 50 Total Taxes 35 th 27 th 50 Fees/Misc. 38 th 42 nd Total 39 th 37 th 50

42 HOW ARIZONA COMPARES ON DIFFERENT TAXES 42 Taxes Per $100 of Personal Income (2012 data) State and Local Revenues Highest Lowest Tax AZ US Avg State State Corporate $ $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 $10.28 $24.21 Alaska $7.70 South Dakota Fees/Misc. $ $14.92 Alaska $2.26 Conn. Total $13.68 $14.91 $39.14 Alaska $11.43 South Dakota

43 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

44 THE FORTUNE 500 STUDY COMPANIES HEADQUARTERED IN ARIZONA Five Year Totals Company Profit Tax Rate Insight Enterprises $314 million $4 million 1.3% PetSmart $2 billion $83 million 4.2% Apollo Group $5.1 billion $328 million 6.4% 44

45 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 45

46 Children s Action Alliance Karen McLaughlin Director of Budget and Research ext