How N.J.'s largest corporations dodge paying U.S. taxes


"The tax code, once you get to know it, embodies all the essence of human life: greed, politics, power, goodness, charity."

— From "The Pale King," by David Foster Wallace

We're closing in on April 18, the extended tax deadline day, so reflection is in order, particularly relating to the force of "greed, politics and power" in our federal tax system and their consequences.

Some corporations are simply not good citizens. Not only do they engage in aggressive tax-avoidance schemes — lobbying and infusing political campaigns with cash to curry favor — they work hard and spend big to create them, as well. As a result, the costs of the nation's infrastructure, technology, research facilities, higher education, homeland security and defense fall to others — namely the rest of us — while the corporations continue to benefit from what they do not help to support.

Corporate shareholders endorse the avoidance strategies — after all, they love their gains and dividends. And as for the highly compensated corporate boards, they give primacy to "stockholder return." In any event, their stewardship appears to give little weight to the nation's welfare.

Taking full advantage of the rules that corporate lawyers, accountants and lobbyists succeed in getting in place is legal, of course, but it's not right. Not even close. 

Schemes and strategies 

Corporations reduce their tax bills while they rant about the unfairness of the U.S. tax code and deprive the U.S. Treasury — that's us — of billions of dollars. They create foreign shell corporations — Google has been in the spotlight recently for shifting revenues from its subsidiaries to a Bermuda shell company, Alphabet Inc. —to protect income from the reach of tax authorities in the United States and the United Kingdom, saving $2.4 billion in worldwide taxes last year.

And, they rely on a variety of carefully manipulated "legal" business write-offs and exemptions to reduce the income they earn stateside in order to avoid U.S. tax.

One offshore tax loophole, for example, has been stretched by corporate tax attorneys and accountants to create ways for companies to register intellectual property, such as patents or trademarks, in tax havens. When a product is sold in America, part of the purchase price is sent to the tax haven to pay for use of the patent, and these funds escape U.S. taxes. Microsoft reportedly sends 47 cents of every U.S. sales dollar to Puerto Rico to pay for patents on discoveries largely made in the United States. And Pfizer turned tax-avoiding paper transactions into an art form: It sells 40 percent of its drugs here but hasn't reported any U.S. profits in five years. Merck also benefits from offshore tax loopholes. The loss to the U.S. Treasury? Some $90 billion a year.

Inversions and stripping billions of dollars

Inversions are particularly noxious ways to reduce taxes. These latest insults to the notion of a progressive tax system work this way: An American company merges with a foreign company and reincorporates in its merged company's country in order to benefit from that country's lower tax rate. But, only the "tax headquarters" moves, not the folks at the top. They stay stateside, you know, reaping the benefits of living in the U.S. While income earned in the U.S. is still subject to federal income tax, they can report having little to be taxed domestically through a variety of devices. "Stripping" is the beast in this, allowing loans and deductible interest payments to offset earnings. In fact, some big players even get tax credits through this scheme!

President Barack Obama said recently that inversions could cost our nation some $20 billion. Stripping, reportedly, may drain even more dollars from the U.S. Treasury.

That's hardly surprising as, according to Forbes, companies racked up some $140 billion in inversion deals in 2015.

When it comes to inversions, New Jersey is hardly immune. Johnson Controls, for example, with headquarters in Milwaukee, recently combined with Tyco International, which is based in West Windsor but "headquartered" in Ireland, after inverting itself to Bermuda, then Switzerland and then Cork, Ireland. The move saves Johnson some $150 million a year. This is a company, by the way, that was saved by the $80 billion federal government auto bailout and that reaped big tax incentives — some $150 million between 1992 and 2009 — from Michigan, as well.

Pfizer, one of the big 10, gets an extra dart for being one of the largest corporations to announce its intention to "leave home" to merge with an Irish company, Allergan — a move it announced just under a year ago. A $160 billion merger, it would cut Pfizer's tax rate on income earned abroad significantly. The deal is off, however, thanks to new rules issued last week by the U.S. Treasury Department and the Internal Revenue Service, which made it less beneficial, economically.

New Jersey fight back?

Pfizer was approved for up to $9.2 million in tax breaks from New Jersey's Economic Development Authority in 2010. It has not exercised the option — not yet — and it may not get to if the New Jersey Legislature has anything to say about it.

A bill has been introduced in Trenton (A3624) to ban inverted companies from receiving state contracts or subsidies. The bill would also require the companies to repay any subsidies that have already been doled out. 

And there is another bill (S61) that is designed to close corporate tax loopholes that cost New Jersey some $200 million annually.  It requires the combined reporting of income between states, thus preventing a multi-state corporation from shipping profits to an out-of-state subsidiary that is beyond New Jersey's reach. Twenty-five other states have similar requirements — that affect 90 percent of corporations doing business in this state — making the bill a no-brainer for New Jersey.

It remains to be seen what the New Jersey Legislature will do, however — and, if these bills do pass, whether Gov. Chris Christie will allow them to become law.

For now, it rests with states to do what they can to mitigate the impact of these corporate rip-offs. New York is poised to take a big step in this direction. It intends to raise taxes on income earned on fees at private equity firms and hedge funds that would equal the tax savings that partners in these outfits receive from using a loophole at the federal level. New York needs New Jersey, Massachusetts and Connecticut to go along in order to avoid tax-haven shopping, but closing just this one loophole would, supporters estimate, raise billions for the tri-state area.

Congress, after all, is doing nothing to limit loopholes or to end inversions, omissions that limit what the Internal Revenue Service can do. Since 2008, some 36 companies have used gaps and loopholes in the law to change their tax nationalities. The Corporate Tax Dodging Prevention Act, introduced last year, would end this tax scam by treating corporations as American for tax purposes when they are still majority-owned by U.S. interests. It's going nowhere. 

Reforming the tax system

The nation's tax system is in vital need of reform. Such reform would include a simplification of the tax code, a broadening of the tax base through the elimination of many if not all tax deductions (which, in sum, favor the rich), and a decrease in the favored treatment of income from capital as opposed to wage earnings. Closing the tax loophole that treats a large portion of private equity and hedge fund managers' income — curiously called "carried interest" — and taxing it at regular salary rates is essential. Even Warren Buffett says so.

We need to push for more disclosure and visibility in order to aid efforts to limit corporate tax avoidance strategies, allowing, for example, the shrewd use of "shaming" to influence the way groups behave and to promote large-scale political change and social reform. Shaming by social media and on-site protests worked to reverse Walgreen's intention to invert as it acquired the U.K. drugstore Boots. The corporation concluded that "it was not in the best long-term interest of our shareholders to attempt to re-domicile outside the U.S." Seriously.

The White House should get on the case of the countries on the receiving end. Ireland and other low-tax countries, ahem, our allies, have to do their part to devise tax policies that maintain a sane global economy.

At the very least, the president could issue an executive order that reforms federal rules to make it harder for inverted companies to win federal contracts. Along with the new rules cited above that reduce the incentives to invert and also eliminate some deductions for subsidiaries of the American companies, these small steps are important ones to take because of the statement they make: They are visible efforts to level an uneven playing field for other companies that end up feeling like fools for staying put; they reflect a concern for small businesses, not to mention individual taxpayers, those who can't take advantage of the schemes, can't compete and wind up holding the (tax) bag.

There is a fundamental issue here, too. Do corporations have no sense of responsibility, no sense of obligation as corporate citizens, for, let's put it plainly, the welfare of the nation? If corporations are people — the Supreme Court has told us they are — and people are citizens, we should expect corporations to act like citizens — good citizens, that is — those who pay their taxes to support the nation's needs, shouldn't we?


The Corporate Evaders

Four New Jersey companies make the top ten list of corporate tax dodgers reported by Americans for Tax Fairness.  They include HoneywellMerck,    Pfizer and Verizon

Verizon, for example, paid no federal income tax between 2008 and 2013. Adding insult to injury, the corporation was awarded in excess of $90 million tax credits by New Jersey's Economic Development Authority (EDA). Honeywell, too, a prime dodger, received EDA tax credits--$40 million—for its move from Morris Township to Morris Plains.

While Johnson & Johnson avoided placement in the top ten, it parked significant dollars abroad.  Along with Pfizer and Merck, Johnson & Johnson has been moving ownership of patents and trademarks to subsidiaries in low- or no-tax countries to avoid tax payments.

Others vie for tax-dodger status, among them Apple, Exxon, Caterpillar, Google, FedEx, At&T, Chevron, and IBM.   General Electric and Boeing joined Verizon in paying no federal income tax between 2008 and 2013.

During that period, these three companies amassed more than $102 billion in combined profits, yet they received over $4.1 billion in income tax rebates from the IRS.  


Linda Stamato is co-director of the Center for Negotiation and Conflict Resolution at the Edward J. Bloustein School of Planning and Public Policy and a faculty fellow at Rutgers University in New Brunswick.


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