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Some Corporations Finally Paying Taxes

May 21, 1988

NEW YORK (AP) _ So-called corporate ″deadbeats″ - companies that have avoided paying taxes even while reaping huge profits - may be less susceptible to public ire under tax reform.

While it is still too early to say definitively, a random check shows many companies that enjoyed big breaks in previous years are indeed paying up as a result of the 1986 tax overhaul.

General Electric Co., Boeing Co. and Dow Chemical Co. are just a few of the non-payers in the early 1980s that now are shouldering some of the tax burden.

″Many of these companies have been getting away with murder at the expense of average people, and it’s nice to see them chipping in like the rest of us,″ said Robert McIntyre, a self-styled tax crusader and director of the watch group Citizens for Tax Justice.

At Federal Express Corp., managing director of taxes Charles Engelken noted that the elimination of investment tax credits hurt the company so much that its effective tax rate on continuing operations jumped to 46.5 percent in 1987 from 36.8 percent in the previous year.

But there are still companies that use the legal deductions available to whittle away their tax liability. General Motors Corp. had profits of $3.55 billion last year and paid no taxes. Ashland Oil Co., the nation’s 14th largest oil company, reaped $133 million in net income last year, but like GM, did not contribute to the government’s coffers.

″There isn’t really any tax law that will ensure every company in every set of circumstances will pay tax,″ said Michael Welch, a partner with the accounting firm Arthur Andersen & Co.

Ashland spokesman Roger Schrum said his company ″did not have taxable income in its refining operations, which resulted in a loss for tax purposes.″

And GM is still using old credits from past losses and capital expenditures to offset its tax liability.

Likewise, Colgate-Palmolive Co. got a $2 million credit in federal, state and local taxes even though it reported net income of $54 million last year. The break was attributed to one-time charges related to a restructuring that included selling units, cutting jobs and ″re-arranging″ 24 plants in an effort to focus on consumer products.

The previous year, Colgate paid $53 million in federal, state and local taxes, noted Kathy Tarbox, vice president of investor relations.

President Reagan became convinced the laws needed changing when then- Treasury Secretary Donald Regan noted the president’s secretary paid more federal taxes than 60 major companies. According to Regan’s recently released book ″For the Record,″ the news made the president’s cheeks turn ″carmine, and there was a spark of resolution in his eye.″

What resulted was a package that eliminated provisions allowing companies to quickly depreciate major purchases, did away with tax credits for investments in plant and equipment, and decimated rules that allowed contractors to delay their tax payments until projects were 100 percent complete.

It also toughened ″minimum tax″ rules that require most companies to pay some tax no matter how many legitimate deductions they had. Under the law, the corporate tax rate fell from 46 percent in 1986 to 40 percent in 1987. This year it will be 34 percent.

Among the companies that continue to enjoy relatively low effective tax rates is ITT Corp., which reported net income of $1.02 billion last year but paid $145 million in federal taxes, according to McIntyre.

McDonnell Douglas Corp. had taxes payable of $2.2 million on profits of $313 million last year. But the company warned shareholders in its annual report that the tax law changes are ″expected to increase the amount of taxes paid for the next five years by $340 million.″

Tax Analysts, a non-profit research and advocacy organization, predicted when the 1986 Tax Reform Act was passed that it would raise the effective tax rates on the nation’s largest 1,000 profit-making corporations by about 20 percent and considerably narrow the gap between the highest and lowest paying companies.

Those expected to be hit hardest were capital-intensive companies, like manufacturers and defense contractors. Service companies, on the other hand, were supposed to benefit from a lower rate.

While his annual study of about 250 major companies is not yet completed, McIntyre said he expects to find that ″in general the bill works ... even though further reforms may be needed to make sure every big, profitable company pays taxes.″

A quick look at 11 major companies that paid no taxes at all in the early 1980s found 9 had paid at least 10 percent of their taxable income under the new law, McIntyre said.

Within this sample of companies, the effective tax rate went ″from nothing to an average 37 percent, which shows that for this group, tax reform worked,″ he said.

What tax crusaders call loopholes are viewed far differently by corporations. General Electric spokesman Bruce Bunch said the old rules were part of a tax policy designed to ″encourage investment in plant and equipment, which is obviously what we did. It’s described as a loophole, but it was a conscious tax policy.″

Joining the ranks of taxpayers may cost money, but it takes the heat off. ″They’re all pleased not to be criticized anymore,″ McIntyre said.

On the negative side, some fear the new law will discourage companies from investing.

″Many companies have suggested that they’re better off leasing instead of buying equipment,″ said Richard Mackessy, a senior manager in the tax department of Price Waterhouse.

But ultimately, Mackessy added, ″corporate taxes are really paid by the individual by virtue of the fact that most corporations try to pass through the increase in their tax bills to the prices of their services and products.″

While the new law is responsible for increasing the ranks of corporate taxpayers, ″it probably has forced corporations to raise their prices somewhat,″ he said.

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