The taxes paid, or not paid, by corporations is a perennial topic in Washington. There is broad agreement that the current rules should be changed but no consensus on what those changes ought to be.
Sen. Bernie Sanders, I-Vt., pulled out a dramatic statistic during a Sept. 24, 2013, back-and-forth with Sen. Lindsey Graham, R-S.C., on CNN’s Crossfire. "One out of four corporations doesn't pay a nickel in taxes," Sanders said.
The two senators were talking about federal income taxes, and we decided we should check to see if Sanders’ claim is accurate. In the context of his debate with Graham, the implication is that if it weren't for special deals in the tax code, these companies would be writing checks to the Internal Revenue Service.
Sanders' office pointed us to a Government Accountability Office study from 2008. The GAO conducts analysis for Congress. In one sense, that study found that Sanders understated the situation. For all corporations, about two-thirds, or about 1.2 million, paid no federal income taxes in 2005. But many of those firms are quite small -- an owner and a couple of employees. For large U.S.-controlled corporations, those with at least $250 million in assets or $50 million in gross receipts, one out of four paid no taxes, as Sanders said. The total revenues for those large companies was about $1.08 trillion.
That, however, is not the end of the story.
Why they owe no taxes
We will focus on the large corporations because those seemed to be the ones Sanders had in mind. The GAO study found that 80 percent of those firms reported no income at the point in their tax return when they subtracted salaries and wages and took other deductions. That is, they showed a gross profit based on selling items for more than it cost to produce them, but they had additional expenses after that, such as payroll and tax deductions, which drove their taxable income to zero.
The GAO lumped together firms that paid no taxes because they failed to turn a profit and those that were profitable but used additional wrinkles in the tax code to avoid paying the government.
Distinguishing between those two groups sheds light on the situation.
Citizens for Tax Justice is a research group that has as one of its goals "requiring the wealthy to pay their fair share." It has written in defense of Sanders’ positions before, but its most recent study of corporate tax payments suggests that the one-in-four statistic might be less significant than it seems.
Steve Wamhoff, the group’s legislative director, said their 2011 report started with the Fortune 500 companies and culled the ones that met two criteria: they had three consecutive years of profitability from 2008 to 2010, and they provided enough information to do an accurate analysis.
Of the 500, 220 did not meet those standards. With some notable exceptions, such as Google and Microsoft, the primary reason those 220 companies fell off the list was they had real losses.
"We get the fact that if you have profits one year but not the next year, you would carry your losses forward," Wamhoff said. "We get that, but if you’ve been profitable for three years straight, those are the ones who really should be paying taxes."
Of the 280 consistently profitable corporations that remained, the study found that 22 paid no taxes in 2008, 49 paid none in 2009, and 37 paid none in 2010. Across all three years, there were 30 corporations that had a tax rate of zero or even a negative rate. The negative rate meant they might get a rebate check from Washington or have a tax credit they could apply to future earnings.
Many familiar names show up in this list, such as Wells Fargo, Boeing, Verizon and General Electric. In the study’s three-year span, those 30 companies had pre-tax profits of about $160 billion, but their direct contribution to the federal treasury was zero.
Citizens for Tax Justice pointed the finger at the rules for accelerated depreciation and stock options. The report said these and various other deductions allowed the firms to avoid hefty tax bills. However, those policy matters fall outside the scope of this fact check.
A lack of profits tends to reduce the tax bill
For fact-checking purposes, the Citizens for Tax Justice findings are interesting for another reason. If pre-tax losses explain why a large number of firms would not owe the government money, then the meaning of Sanders’ claim begins to look quite different. We would not expect a firm without profits to pay taxes. The GAO study did not probe this deeply. The Citizens for Tax Justice did, albeit for a smaller group of corporations.
In rough terms, out of the original 500 corporations, 220 or about 40 percent were dealing with losses.
The study found 78 consitently profitable companies, or about 15 percent of the original 500, that paid no taxes in at least one year. That is less than one out of four; it’s closer to one out of six.
If we look at the 30 that paid nothing in any year, the ratio drops to one out of 16.
Eric Toder, co-director of the Tax Policy Center, generally seen as a centrist think tank, cautions against reading too much into the 2008 GAO study. In a blog post written shortly after it was released, he called it "interesting and suggestive, though also not conclusive."
Toder noted that most corporations are quite small with gross receipts of less than $250,000. They report no income because the money turns up as paychecks to the owner and employers where it is subject to the individual income tax. He agreed that some large corporations use "aggressive techniques to shift reported profits to low-tax jurisdictions," but even those end up paying some U.S. taxes.
Toder’s bottom line on the one out of four statistic? "Whatever the technical factual basis of the statement, it isn’t terribly meaningful or revealing."
William McBride, chief economist at the Tax Foundation, a group that promotes lower taxes, finds Sanders’ ratio "misleading." McBride, as do the other analysts we contacted, pointed to the costs of doing business. His list included salaries and wages, interest, depreciation, rent and other taxes.
"You cannot legitimately deny these businesses these write-offs," McBride said.
Sanders said that one out of four corporations doesn’t pay a nickel in taxes. The statement reflects a 2008 study from the Government Accountability Office. However, the GAO study did not distinguish between firms that had losses in the normal course of business and those that reported losses solely through the use of the tax code. Groups along the political spectrum give much weight to the costs of doing business that can lead to a bad year. There is wide agreement that losses in one year can be carried forward and that salaries are an unavoidable expense, to mention just two factors.
Special tax breaks and abuses of the tax code exist but even an analysis from a group that shares many of Sanders’ perspectives pointed to a ratio that was, at most, one out of six and possibly as small as one out of 16.
The one out of four statistic fails to take into account many relevant factors.
We rate the claim Half True.