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A study commissioned by BusinessWeek shows that Corporate America pays the IRS anywhere from zero to 400% of income
FPL Group (FPL), owner of Florida Power & Light, understands the value of alternative energy. By setting up everything from 1,500 acres of solar electric systems in California to wind farms across the U.S., the Juno Beach (Fla.) utility has avoided the need to build 12 new power plants. And those investments create another green benefit: tax breaks. Over the past four years, FPL has paid just $88 million in taxes on earnings of nearly $7 billion. FPL spokeswoman Jackie Anderson says the company is merely taking advantage of incentives to develop renewable resources.
No one likes to pay taxes. FPL paid more than $500,000 to Washington lobbyists last year to keep its tax breaks coming. That strategy seems to work, and corporate tax receipts have been on a steady decline—a trend that could change in the coming months. President Barack Obama's current budget contemplates ending the deferral of income tax on foreign corporate earnings, as well as other tax breaks. At the moment, most companies pay less than the official tax rate of 35%. A study published last summer by the General Accounting Office found that from 1998 to 2005, 55% of large U.S. companies had at least one year of paying no taxes at all.
To get a real-world view of how corporate players fare under the complexities of the tax code, we had data tracker Capital IQ analyze the tax burdens of companies in the S&P 500-stock index. (Like BusinessWeek, Capital IQ is owned by The McGraw-Hill Companies (MHP).) Instead of simply adopting the tax rate that companies report on their income statements, Capital IQ looked at the cash taxes disclosed in footnotes and cash flow statements companies file with the SEC, the closest we can get to what they actually paid in taxes. (An interactive list of the 50 highest payers and 50 lowest payers is available at businessweek.com.) By dividing that figure by a company's pretax income (excluding extraordinary items) and averaging it over four years to minimize anomalies, we calculated what we consider to be the true tax rate.
The result is a list of players whose tax burdens ranged widely, from essentially nothing to almost 400% of pretax income a year. Troubled industries with weakening profits had the highest tax rates: The auto sector averaged 45.5%, banks paid 50.3%, and real estate companies paid 66.1%. The least-taxed industries were semiconductors, at 19.6%, often because of high expenses in the U.S. and high overseas income. Infrastructure investments helped to keep telecoms at a low 22.2%.
With a prolonged recession and a new Administration in Washington, tax deals could become sparser in the coming year. The new budget calls for the removal of deferred tax payments to oil companies with high drilling costs, for example. That helped Range Resources (RRC) pay just 0.4% last year. CFO Roger Manny insists that ending deferments will hurt the cash flow of his company, discourage exploration across the industry, and lead to higher energy prices.
Of course, tax breaks never die without a fight. Tax lobbying has increased 47% over the past decade, according to the Center for Responsive Politics. Companies complain that the official U.S. rate is higher than every other industrialized nation's except Japan's. But fighting to keep tax rates low is hardly an American phenomenon. As Chas Roy-Chowdhury, head of global taxation at the Association of Chartered Certified Accountants, notes: "It's the same around the world."
With Frederick F. Jespersen, Ellen Gibson, Brian Burnsed, Jane Sasseen, and Greg Spielberg
For a detailed look at the 100 highest and lowest players, click here.