Corporate Tax Loopholes Under Scrutiny

As state governments struggle with bleak fiscal outlooks in 2012 and drastic budget cuts continue to take affect, many citizens still assume that lawmakers have tapped into every available source of revenue. Still, a creeping sense that not everyone has been paying their fair share has shifted the conversation.

Widespread news coverage in 2011 of Wall Street shenanigans, the growing income gap and the shrinking middle class has heightened public awareness of the disproportionate burden placed on working families – while corporations exploit loopholes in the tax code to avoid any shared responsibility. President Obama proposed closing some corporate tax loopholes to help pay for his job plan and is expected to make tax fairness a central issue in his reelection campaign.

A recent report by the Citizens for Tax Justice (CTJ) and the Institute on Taxation and Economic Policy (ITEP) reveals why so many Americans are outraged. The study shows that states may have lost a significant amount in corporate tax revenue during the peak recession years of 2008-2010. In analyzing the tax returns of 265 of the richest S&P 500 corporations during those years, the CTJ and ITEP found that the companies reported $1.33 trillion in domestic profits, but paid states only about half of what they would have if they had paid at the average corporate income tax rate of all states. The report also found that 68 corporations reported paying zero state corporate taxes in at least one year between 2008 and 2010.

“What we’re talking about here is a class of multi-state and multi-national tax dodgers,” says Susan Kennedy, a tax attorney and manager for Education Funding and Revenue at the Alabama Education Association.

According to the Nelson A. Rockefeller Institute of Government, corporate income taxes make up only 5.7 percent of state revenues – down from 9.7 percent in 1980.

As more corporations avoid contributing to state treasuries, the burden of paying for budget shortfalls has been placed on average working families and critical public services. Over the past few years, education budgets have been slashed across the country as lawmakers declare their states to be “broke.”

What would $55 billion (the additional amount that these corporations would have paid if they followed the state laws) in lost corporate revenue have funded? According to the National Education Association, about 142,000 education jobs could have been saved during 2008-2010. NEA believes that lawmakers need to close tax loopholes first to modernize the tax system and fund public education appropriately.

However, building awareness of the magnitude of corporate tax avoidance is an uphill climb because detailed information about the total amount of state corporate income tax paid by a company in specific year is difficult to uncover.

Still, in the absence of corporate tax disclosure reform, NEA state affiliates are taking significant steps to raise public awareness by submitting a series of six questions (through a friendly legislator to state department of revenues or taxation) that can still weed out detailed information about the losses incurred by corporate loopholes.

In 2009, for example, the Mississippi Association of Educators (MAE) commissioned an analysis of the taxes corporations operating in the state pay. While detailed information on tax returns remained off-limits, specific questions, such as “How many corporations paid zero taxes in the last three years?” were not. Other NEA state affiliates including Indiana, Georgia, Missouri, Nebraska, New Mexico, and Virginia are also collecting this information and are determined to push the closing of tax loopholes on their state’s next legislative agenda. The political climate has changed, as more polls show the public wants these loopholes closed before any more spending cuts are implemented.

In Nebraska, for example, a recent statewide survey by Harstad Research found that more than 70 percent of the public support ending corporate tax giveaways. Opponents dismiss closing loopholes as a gimmick that would not balance state budgets. That misses the point, says Nancy Fulton, president of the Nebraska State Education Association.

“This lost revenue makes a difference to our students who need resources in their public schools to succeed, “Fulton said. “It makes a difference to the parents and their children who pay higher tuition at the university and state colleges – and end up with huge loans to repay. It makes a difference to middle income taxpayers because we will pay higher taxes so that big corporations do not.”

Learn more about the campaign to close corporate tax loopholes