Do Corporations Pay State Taxes?

CAVANAUGH: This is KPBS Midday Edition. I'm Maureen Cavanaugh. The fact that many of the nation's biggest corporations pay little or no income tax is so well known that it isn't even shocking anymore. Not shocking but still disturbing, and to many people just plain wrong. A new proposal in the California state assembly wouldn't change tax law, but it would require corporations to disclose how much state tax they paid, letting consumers know which companies are not paying their fair share. There was a rally in San Diego today by the group called the refund California coalition in support of this legislation. David Lagstein is director of San Diego's alliance of Californians for community empowerment. Welcome back to the show. LAGSTEIN: Thanks for having me today. CAVANAUGH: Steven Gill is associate professor of accounting at the SDSU school of business. His specialty is taxation. Welcome. GILL: Thanks. CAVANAUGH: David, tell us about this rally. LAGSTEIN: There was a rally today at the Sempra headquarters in downtown San Diego. And it was community members, union members, and activists. We went to the headquarters and had a rally, and our purpose was to ask Sempra if they would disclose the amount they paid in state taxes last year. So we walked in there and asked to speak to the CEO. Unfortunately they did not give us this information but obviously part of that is to make a point and shine a light that Sempra is one of the multinational corporations that doesn't pay their fair share of taxes. And we want the information of what they're paying in the state. CAVANAUGH: Is that why you specifically chose Sempra? LAGSTEIN: Yes, Sempra is one of 68 publicly traded corporations. There is an extraction of the data of how much they paid in state taxes across the 50 states. But we don't have how much they paid in California. And we'd like that information. These are huge companies like Wells Fargo, PG& E. And they're not paying their fair share of taxes, and hiding through corporate loopholes. CAVANAUGH: Is it possible that they have paid its fair share in California? LAGSTEIN: We don't know. The one thing that we do know is in 2010, their state taxes across the 50 state, they didn't pay any taxes. CAVANAUGH: We asked Sempra if they had a response to this rally today. They did not respond to that request. Steven, let me bring you into the conversation. We've all heard of corporations making immense profits that pay very little in taxes, sometimes no taxes at all. Are the tax laws structured in a way that favors corporations? GILL: Well, I think tax policy is written in a way that probably in the current climate favors business. I'm not sure whether corporations are drawn out specifically. Certainly the recent change to a possible single sales factor in California, which I think is in large part part of the crux of what this bill was after is definitely a probusiness change. It's intended to be a probusiness change for businesses that employ a number of people here in the State of California or have a significant capital investment here. By tax definition, in a weird way, when you go to a single sales factor, you provide a tax break to companies that have a large presence here in California. In terms of kind of from the global perspective, whether corporations are paying too much or too little is a very relevant -- it depends on your perspective of what's too much or too little. From an overall perspective, one might say that corporations might pay no tax. Largely what happens, and we can go down an economics path on this, which I'm not an expert in, they get to pass those costs onto the consumers anyway. And so the corporate tax may not fit into an overall strong tax policy scheme, but we have it. And it doesn't appear to be going away any time soon. So since that's the case, we probably ought to do our best to have a corporate tax law that seems fair, both to business and allows for growth, but yet serves the public with raising enough revenue that's necessary to serve the state. CAVANAUGH: You are a tax specialist. How does a corporation that makes millions in profits actually wind up paying little or no taxes? Can you give us some idea of the kind of strategies that corporation might use? GILL: Sure. One of the easiest ways, and most common way, and you see a lot of this in San Diego, you source your income offshore. So you generate the profits in an offshore country, and they don't come back to the U.S., which means they probably don't come back to California either. And if those nations enjoy a lower Margeal tax rate than the United States, you're going to see the corporations pay less and less tax. As we see big companies expanding globally, we see the effects of that on our current fiscal revenue situation. Other ways, the tax code does have certain tax expenditures in the language of the tax policy that allow for certainly corporations to enjoy tax breaks that they might not otherwise. Things like research and development, or perhaps accelerated deductions for capital cost that you might normally deduct over a long period of time. So corporations of course and many businesses have the opportunity to engage professionals who can best understand those rules and are probably going to serve to maximize their benefit to the detriment of the state or the federal revenue. CAVANAUGH: Now, David, one of the reasons for this rally was in support of the proposed legislation here in California, AB2439. What would it do? LAGSTEIN: As we talk about what the tax structure is, part of it is that legislatoreds do need to make choices on tax structure. Each of these corporations are spending a ton of money on lobbyist ares and accountants to write the rules, but there are impacts on communities. It's our belief that having a bright shining light on how much corporations are pay, it's going to help the public and legislators decide. We're in a situation in San Diego looking at cutting seven school days for kids in San Diego. The increase in tuitions at community colleges. The cuts at public safety. The list goes on and on. And it's our hope and expectation that when there's more transparency around what specific corporations are paying, we can look closer and try and understand what the policies are that get us there, and can we make them a little bit more fair so the impact on the community isn't as devastating as it's been? CAVANAUGH: This proposed legislation would require corporations that do business in the State of California to disclose how much or how little -- in other words reveal their tax returns. LAGSTEIN: That's correct. I'll be honest, this is no different than what Mitt Romney is being asked to do. We're just asking corporations to disclose how much they're paying in state taxes. CAVANAUGH: Steven, corporations are legally bound to do the best they can financially for their stock holder; isn't that right? GILL: That's largely correct, yes. CAVANAUGH: So what effect do you think this proposed disclosure law would have? GILL: Well, I think that David is correct. A Supreme Court once said that sunshine is the best disinfectant. And there's no doubt that disclosure can be a very, very powerful tool in terms of informing tax policy. And so what we have -- we have to measure the disclosure with the possible cost that's going to put not on the corporations or businesses but rather on the tax system itself. Ample research has shown us that a system where the taxpayers feel like they're being treated like robbers is a tax system that has lower compliance levels. So the U.S. for many years has had a strict confidentiality around taxpayer information. And if people choose to disclose that voluntarily, that's one thing. But I don't think that the service or the franchise tax board necessarily supports a notion because of the spillover effects that you might see from a compliance perspective on the broad public. CAVANAUGH: That's a fascinating take. I never heard that before. David? LAGSTEIN: It's certainly an interesting perspective. What I would add, the question is do people opening up their electric bill every month and read that Sempra energy made a $1.1 billion profit, I think a lot of people feel like maybe they are robbers and should be treated as such. Nobody is accusing them of breaking the law, but there's something about basic fairness that doesn't seem to measure up. I think again our legislators need to weigh around privacy and disclosure, but I think we're going to argue these are publicly traded corporations, nobody is asking individual or private parties to share this information. We think that there should be information there again because it's going to help us make better decisions all with an eye on the impact of the project in the communities and struggles that folks face every day. GILL: I think David has a good point. Disclosure is a wonderful thing. But the bill asks for the largest 1,500. And that doesn't say the largest 1,500 that paid little tax, that paid no tax. It's the largest 1,500. So what we're going to do is drag in perhaps some innocent parties who may be doing their best to pay their fair share. And it could be a situation where that in and of itself doesn't bother them. The disclosure that they're doing their part as a good corporate citizen probably doesn't bother them. But the other information that may or may not come along with that when we talk about, well, we're disclosing the liability with the State of California, that immediately tells us probably what the taxable income is in the state. It perhaps starts to provide competitive information that companies are reticent to disclose for good reason. And you open up the slippery slope argument, which I'm never a fan of, but it's there. We start with 1,500, and where do we go from there? How much disclosure is too much? CAVANAUGH: We have a caller on the line. But we've been using this term, fair share. I think in theory there's a federal tax rate of 35% on corporate profits; is that right? GILL: That's correct. CAVANAUGH: Would that be the fair share that we're talking about? GILL: Well, again, 35% is what we call the highest marginal tax rate. There are smaller corporations that would pay less. But that would represent over a long run, full, the amount of tax you would expect a profitable corporation to pay. Again, the law is built with certain expenditure items that allow that rate to be reduced. So we see fewer and fewer companies paying that amount. It would be hard to say that's their fair share if the tax law itself legislates a different amount to them. CAVANAUGH: Keith from city heights. Welcome. NEW SPEAKER: Thanks for taking the call. CAVANAUGH: You're welcome. NEW SPEAKER: My thing with the issue is that corporations don't pay taxes. They collect taxes in the form of taxes they charge for their products. CAVANAUGH: That was a point Steven brought up. So I'm going to give that to you, David. LAGSTEIN: I think that that certainly is an argument. The old argument as goes General Motors goes America. But it's based on the notion that a corporation is going to treat their workers right, and a corporation is going to treat the community right. And I think what it's important to add as we think about this, with due respect, he is a tax professor, so there's a philosophical question about disclosure and about rights. The struggles of communities every day, the example of schools being closed, the example. Healthcare cuts, these are real. And I think the more that again we can use this to gather information, we really have to weigh what are the struggles that we're all having to deal with because of the economic crisis, and the budget crisis, let's weigh that against the likes of Sempra energy, Wells Fargo, bank of America, INTEL, and the huge profits they're making. They need to give a little bit more to give us all a chance at the American dream. And that's really what this is about. This is a disclosure bill. But it's a question about what is the fair share. We can't give a number, but when so many people are struggling and corporate CEOs are making millions and huge profits, we have to look at a way to balance this there. And it's clearly out of balance. CAVANAUGH: And I want to clear, this is a disclosure bill, but it's in the background aimed at getting public opinion to change tax law, isn't it? LAGSTEIN: Yes, and in full disclosure as well, this is just a disclosure bill. But I think we're certainly very transparent that our belief is when this information is disclosed, it's going to spur on different changes. But the bill itself is not a revenue bill. It's a disclosure bill. So thank you for helping me make that clarification. CAVANAUGH: Steven, let me ask you something in closing. David brought this up. Taxes have been in the news lately in regard to presidential candidate Mitt Romney's tax returns. You must be loving that conversation. GILL: Any conversation about tax policy is a great conversation. LAGSTEIN: He may get called in again to talk about Mitt Romney! [ LAUGHTER ] CAVANAUGH: Mitt Romney has been pressured for months to release his taxes. Is it possible a man as wealthy as he is could have paid no income tax? GILL: It's unlike. Though there's a good chance that someone who generates the character of income that the candidate Romney does is likely to pay at a rate that might raise some eyebrows. It's not unlike the point that David is bringing up with disclosure. And I think that's fair game for a presidential candidate. It's within our rights to ask. It's probably within his rights to refuse. And that can inform our vote or not. I think I'm troubled by the disclosure act because the legislature and the assembly and the Senate already have the information they need to make the choices they need.