Tax reform may be more lucrative than advertised for corporations

WASHINGTON – Many of Minnesota's major corporations paid lower tax rates in 2018 than new, dramatically lower corporate tax rates. That was among the findings in an analysis of government filings by the Institute on Taxation and Economic Policy (ITEP).

ITEP, a nonprofit that gathers data to show how "taxes affect public revenue and people of various levels of income and wealth," examined Securities and Exchange Commission records of 379 corporations nationwide. Its conclusions raise questions about the large, permanent reduction in the U.S. corporate tax rate that was the centerpiece of a major tax overhaul passed by Congress and signed into law by President Donald Trump in 2017.

Reduction of the U.S. corporate tax rate from 35% to 21% was touted as necessary to make U.S. companies more competitive in the global economy. ITEP says its data show that corporations combined the rate reduction with loopholes to drive their effective rates of current taxes paid on U.S. income down to zero and single digits in many cases. The collective average effective tax rate for the 379 companies studied was 11.3%, slightly more than half what the new tax law prescribed.

Supporters of the tax changes said the new law simply has not had time to work.

Last week, Douglas Holtz-Eakin of the self-described "center-right" policy group American Action Forum told a House hearing that the Congressional Budget Office expects corporate tax revenue — $194 billion in 2018 — to exceed $400 billion by 2030.

"Proponents of the law claimed it would boost federal corporate tax revenue," countered Matthew Gardner, the lead author of the ITEP study. "But that is nearly impossible since the law not only reduced the corporate tax rate, it also left some of the most egregious loopholes intact."

Gardner said the loopholes pushed already shrinking corporate federal tax payments lower by an additional $64 billion from what companies in the study would have paid at the newly reduced 21% rate.

Several Minnesota companies included in the ITEP study challenged its methodology and conclusions, saying they paid higher tax rates than the study found. Some companies said they used tax-law incentives — not loopholes — to increase investments while temporarily lowering their tax rates, in some cases to zero or single digits.

"Our federal income tax payments are currently low — in many years zero — due to federal tax incentives available for the sizable investments we have made in our system and renewable energy," said Xcel Energy, which paid no federal income taxes in 2018, according to ITEP.

General Mills, which ITEP said had an 8% federal tax rate 2018, called the analysis too narrow.

"We believe taking one year in isolation, or looking at only one metric, is not a good indicator of an organization's tax expense as there are many fluctuations or non-re-occurring items that impact the effective tax rate," the company told the Star Tribune. The company's 8% tax rate in 2018 "was driven by several one-time items, so is not reflective of our ongoing tax rate."

Target Corp., which ITEP found had a 9.1% federal tax rate, said it has built 50 new stores since 2017 and has been raising its minimum wage, which is slated to reach $15 per hour in 2020. "The significant capital investments we've been making into our business resulted in accelerated deductions in 2018," the company said of its single-digit tax rate.

Best Buy said it used some corporate tax savings "to fund one-time bonuses for employees, as well as expand employee benefits to include paid caregiver leave, expanded mental health benefits, paid time off for part-time employees and backup child care."

Ecolab disputed ITEP's conclusion that it paid a corporate tax rate of 0.6%.

"Our 18% U.S. federal tax rate is less than the 21% post reform statutory U.S. federal tax rate because we received a credit for qualifying U.S. [research and development] expense under the tax reform regulations," Ecolab said in a statement.

Gardner defended the ITEP study, saying it measured only actual tax payments on current U.S. income, not accrued taxes claimed but not yet paid on U.S. income or transition taxes paid on foreign income.

"We are interested in evaluating U.S. policy," Gardner said.

The U.S. Chamber of Commerce, which lobbied heavily for the tax cut, continues to support it, arguing that sending less money to Washington benefits the country.

In addition to investing in capital and people, many Minnesota companies in the ITEP study have also spent billions of dollars of their tax savings on stock buybacks since 2018. Collectively, 3M, Ameriprise Financial, U.S. Bancorp, C.H. Robinson Worldwide, Target and Best Buy have announced $21.17 billion in stock buybacks that enrich shareholders and executives, according to Winston Chua, an analyst for EPFR, part of Informa Financial Intelligence, which aggregates public notices of stock repurchases.

A Joint Taxation Committee report last week showed federal tax revenue from corporations rebounded to $243 billion in 2019, but receipts remain more than $100 billion a year short of what they were.

Discussion of a shrinking corporate tax base came as Trump proposed a new federal budget that includes cuts to social programs because of a lack of federal revenue. The proposed budget envisions no major tax increases but includes an $844 billion item, presumably to replace the Affordable Care Act, the Obama administration's national health care law. Many budget analysts see those funds coming from cuts to Medicaid, the federal government's health insurance program for the poor and elderly.

Meanwhile, tax rates written into law rarely correlate with what actually gets paid.

"The effective tax rate has always been below the statutory rate," said Eric Toder, a federal tax specialist at the Urban-Brookings Tax Policy Center, a nonpartisan think tank. "Global companies are booking profits in tax havens."

Corporate tax cuts were supposed to limit the attraction of those havens by lowering the overall tax rate. As a result, the Trump administration lifted some restrictions on booking money where taxes are low to nonexistent.

Still, the numbers never added up. Marc Goldwein, a senior vice president at the deficit-fighting Committee for a Responsible Federal Budget, said tax changes cut corporate taxes by $1.5 trillion over a decade but closed loopholes worth only $800 billion.

While the jury remains out on corporate tax cuts, Jason Furman, a Harvard professor who once chaired President Barack Obama's Council of Economic Advisers, issued a warning at the House hearing on corporate income taxes.

"Business investment growth has slowed to nearly a halt," he said, "while economic growth has been propped up by increases in government spending."

Jim Spencer • 202-662-7432