Large Companies Avoid State Tax

Study of Fortune 500 companies suggests states lost $42.7 bln in revenue.

Sixty-eight large U.S. corporations paid no state income tax in at least one of the past three years and 20 had an average tax rate of zero or less in that period, according to a report by the Institute on Taxation and Economic Policy.

The Washington-based research group, backed by labor unions, found that three companies, Washington-based Pepco Holdings Inc., American Electric Power Co. of Columbus, Ohio, and DuPont Co. of Wilmington, Delaware, paid no state income tax in each year between 2008 and 2010.

The study examined 265 companies in the Fortune 500 that were profitable in all three years and reported enough information to evaluate state income tax payments.

It found that those companies paid state income taxes equal to 3 percent of their U.S. profits, about half of the average statutory state tax rate, according to Matthew Gardner, executive director of the institute and co-author of the report.

The reduced rate of corporate state income tax payments translates into $42.7 billion in forgone revenue to those states in the past three years, the report found.

“Our report should be understood to show that state income taxes are not raising the revenue they were designed for,” Gardner said.

Forty-four states, plus the District of Columbia, levy some form of state corporate income tax. Ohio, Nevada, South Dakota, Texas, Wyoming and Washington, don’t have the tax, Gardner said.

Gardner said state corporate income tax revenue has been falling for 20 years. He attributed the decline to increased state subsidies to companies and to federal tax breaks that reduce the amount of taxable revenue. Companies also devote “money and legal firepower to coming up with tax-avoidance schemes,” he said.

States have contributed to the decline by shifting corporate taxation from property and payroll to sales, which generally yields lower taxes, said Joe Huddleston, executive director of the Washington-based Multistate Tax Commission. The organization of state governments administers tax laws for multistate businesses.

The three companies that, according to the report, avoided state income taxes were among 30 corporations listed as paying no federal income tax in the same period in a study last month by Citizens for Tax Justice, the institute’s sister organization.

Pat Hemlepp, a spokesman for American Electric Power, said the findings in both reports are skewed because the period occurred during an economic downturn when the company participated in federal stimulus programs to create jobs. Those programs benefited the company’s state and federal tax position, he said.


‘Villainizing Companies’

“There was bonus depreciation and other programs that allowed for deferral of taxes,” Hemlepp said in a phone interview. “All a report like this is doing is villainizing companies for following the directives of Congress and the administration.”

From 2005-2007, the three years before the period covered by the study, AEP paid $1.3 billion in federal taxes and $87 million in state taxes, he said. AEP’s tax payments will begin to revert to similar levels when the effects of stimulus programs wind down in 2012, Hemlepp said.

Pepco also cited the effects of stimulus programs in a statement on its tax payments.

The power company made about $2 billion in capital investments subject to tax benefits including bonus depreciation and other deductions, chief financial officer Anthony Kamerick said in a statement.

The accelerated deductions, along with “significant cash contributions the company made to the employee pension retirement plan” were the main reasons Pepco didn’t face a tax liability in that period, according to the statement.

DuPont spokeswoman Tara Stewart declined to address the conclusions of either report.

“DuPont complies with all tax laws and regulations in every jurisdiction in which it operates,” she said in an email.


Bloomberg News

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