Opinion

David Cay Johnston

You’re paying taxes, so why aren’t energy companies?

By David Cay Johnston
November 8, 2011

By David Cay Johnston

The views expressed are his own.

In a competitive market, economists argue endlessly about who bears the burden of corporate income tax. Is it owners, who get a smaller net return? Or workers, who make less? Or suppliers, who get lower prices? Or customers, who pay higher prices?

In one sector of the U.S. economy, however, the answer is clear-cut. Corporate-owned utilities (mostly electric and natural gas) and pipeline partnerships, all of them legal monopolies, pass their income tax burdens on to customers.

Now a study, released last week, provides powerful new evidence that these two industries convert corporate income taxes from a burden to a benefit.

The study was prepared by Citizens for Tax Justice and the Institute on Taxation and Economic Policy. Both are foundation-backed nonprofits that say the tax system favors the rich and corporations over most Americans.

Utilities charge prices, known as rates, set by political appointees who regulate the industry. Embedded in those rates are generous sums to cover corporate income and all other taxes. Pacific Gas & Electric, the northern California utility, was awarded $431 million to pay 2007 corporate income taxes, a final decision by the California Public Utilities Commission shows. Similar amounts were approved, or are in the process of final approval, for each subsequent year.

But in the three years from 2008 through 2010, PG&E’s corporate parent did not pay roughly $1.7 billion in federal income taxes on $4.8 billion of profits, the expected sum based on the federal 35 percent corporate income tax rate. Instead, PG&E collected more than $1 billion in refunds, thanks in good part to a 2008 increase in accelerated depreciation, which lets companies defer taxes into the future, the study showed.

Brian Hertzog, PG&E’s Washington director of corporate relations, said that the rules that let the company defer paying taxes into the future mean it can use that money immediately to help pay for new plant and equipment. He said this costs much less than borrowing in the markets and thus benefits customers.

Hertzog has a point. When customers pay their monthly bills they loan money to PG&E at zero interest, which is a lot cheaper than borrowing in the markets.  But that is neither capitalism nor market economics.

The market chooses to invest and sets a price for credit. The regulatory and tax systems force captive customers to make interest-free loans to utilities, denying the customers the use of their money for other purposes, including paying down their own debt, which may be at much higher interest rates than the savings from using that money to finance utility projects.

Forcing captive customers to extend interest-free credit to utilities strikes me as a subtle form of legalized theft.

PG&E’s roughly $2.7 billion swing from burden to benefit is not unique. The 26 large utilities studied paid an average rate of just 3.7 percent over the three years, a 10th of the 35 percent statutory U.S. tax rate. Half of the 26 corporate-owned utilities analyzed got money back from the government, thanks to deferrals and tax benefits from tax shelters in non-utility operations. Just four paid corporate income tax of more than 10 percent.

The trophy for turning the burden of taxes into a benefit goes not to General Electric, whose skillful use of tax law and lobbying for tax breaks is famous, but to Pepco Holdings, which owns the monopoly electric utility in and around the U.S. capital. Pepco’s three-year tax rate? Minus 57.6 percent. GE’s was only minus 45.3 percent.  Pepco says it pays all of its taxes as required by law. For sure that’s true.

Here’s the irony. Pepco’s biggest customer, by far, is the federal government. So, federal taxpayers and other customers paid electric rates to Pepco that assumed about $309 million in corporate tax payments would flow to the Treasury, only to see $508 million of their taxes flow to Pepco as refunds. Ouch.

The roughly $817 million tax benefit Pepco enjoyed — from taxes it collected but did not turn over combined with refunds — almost equaled the $882 million in profits Pepco’s corporate parent reported during the same period.

This is an old story at Pepco Holdings. In the six years preceding the study, 2002 through 2007, Pepco Holdings reported pretax profits of $949.2 million. Its cash paid for taxes was negative $116.4 million, my analysis shows. Cash paid for income taxes is a simpler measure than the painstakingly detailed examination in the Citizens for Tax Justice study. Cash paid also tends to understate reality.

Pipelines have an even juicier deal. Under the 1986 Tax Reform Act they are exempt from paying corporate income taxes if organized as partnerships. However, under a rule from the era of President George W. Bush, federal regulators let them collect the corporate income tax anyway. That IS legalized theft.

How do utilities and pipelines convert the burden of corporate income taxes into a benefit, whether temporary or permanent? Easy as 1, 2, 3.

  1. Political appointees on regulatory boards, many of whom come from and return to the utility and pipeline industries, require customers to pay the utilities’ corporate income taxes measured as if the utilities were stand-alone companies filing their own tax returns.
  2. Most utilities do not stand alone, but are subsidiaries of holding companies.
  3. Each holding company files a tax return that consolidates its utility and non-utility businesses, allowing it to capture some of the utility taxes as additional assets or as profits.

The result is little or none of the tax that customers are forced to pay actually gets to government.

Here are two questions to ask about this costly state of affairs: Why have you not heard about this from anti-tax politicians and organizations that insist they are trying to ease your burdens? Who will put an end to this forced transfer of wealth from utility and pipeline customers to the companies’ shareholders?

 

Comments
86 comments so far | RSS Comments RSS

The President,as leader of his party, once again expressed that every American should pay his fair share in taxes. One sizable loophole in the Federal Tax Code is TAX EXCLUSION INCOME. It is time to do something about this unfair tax revenue placed disproportionally on small business & especially the self-reliant. The President is correct we are all in this mess together. It is time to correct the inequity of Tax Exclusion income for some rather than for all workers earning income & paying taxes on all received income. There is no reason for this inequity especially after the President many request for equity.

Posted by buckaroo5 | Report as abusive
 

Aren’t these the same entities that the US Supreme Court, in all it’s infinite wisdom, granted the right to contribute unlimited funds to political campaigns?

It’s like a perpetual motion machine. The companies finance the election of the people who grant them these benefits so the companies can afford to finance the elections of the people who grant them these benefits so the…

Now if this machine only produced electricity…

Posted by LEEDAP | Report as abusive
 

it’s not just the energy corporation ‘people’– it’s all the corporation ‘people’ that aren’t paying taxes– WHY THE HELL NOT?????’ yessir, if the supreme court has chosen to call corporations ‘people’, they may have to go back and define the word ‘people’– then decide what the definition of ‘american’ is——-

Posted by ffotoragg | Report as abusive
 

I hope some people in positions of authority, or those competing for public office, will read your column…

Posted by matthewslyman | Report as abusive
 

This is outrageous! We should turn off all these companies right now! Occupy Wall Street 2011!!!!

Posted by JoeDietz | Report as abusive
 

Congratulations David, another great research! Send CC to all lawmakers, please.

Posted by robb1 | Report as abusive
 

I love the blazing yellow Shell Oil advertisement that is accompanying this article on the Reuters web site. Coincidence or responsive PR?

Posted by effoff | Report as abusive
 

even more basic: corps pay tax on profits, not on income like cits do. imagine if we could write off all our living costs!

Posted by markhahn | Report as abusive
 

Congratulations on pulling this traditionally ignored or cleverly concealed situation out of the political swamp and hanging it on the line for all to see. I have started, run and sold a going business, and generally consider myself “pro-business” but until fairly recently had a hard time believing there are businesses whose practices are, when push comes to shove, anti-American.

Americans have long had good reasons to be suspicious of any and all monopolies for very good reason(s). In today’s world there are less and less circumstances that continue to justify them. I would urge future investigation into practices common in states like Texas, where the Insurance Companies enjoy effective control of the state agency regulating them, the Funeral industry enjoys effective control of the state agency regulating them, as do many professional “self-regulating professions such as lawyers, doctors and judges.

The primary groups lacking effective representation seem to consistently be the taxpayers, citizen, and/or consumers whom all the others purport to serve.

Posted by OneOfTheSheep | Report as abusive
 

Someone start a charitable organization to champion the common man based on donations, every American donate a dollar….get some bright unemployed graduates on the job.unseeing FB and Twiter it could work.

Posted by Gillyp | Report as abusive
 

Dodd-Frank sounds like legislation we need and want, but the end result of every line in the bill, is, and will be, higher costs for the consumer/customers.
As soon as utility companies start paying all their taxes, installing all the required pollution controls, and complying with all current and proposed regulations, will come the day when consumers of power will be paying more, much more.
How much do you want to pay for power? 10cents/kwh? 25cents/kwh? $1/kwh? $5/kwh? It all depends on how much taxes we want the utilities to pay!
We pay them one way or another, their is no way to avoid them.
If were not subsidizing (paying) them with tax breaks and loopholes, then were paying for the same thing through higher prices for power.
How much is your current power bill? Want to see it double? Triple? or more? Just make your utility company start paying all its taxes.
You probably get what I’m trying to say, its that ‘for every action there is an equal and opposite reaction’.
More regulation equals higher consumer prices.
Some might twist my words as being pro-pollutionn, pro-tax breaks, but thats not true. Common sense is my point. Some things are worth paying more for, and other things might not be.
If we really want to standup against your utility company, Insulate the hell out of your house. Become energy smart.

Posted by neversaynever | Report as abusive
 

Why should they pay? Here in Brazil we pay ours and their taxes. So, if they pay, in the end, you´re gonna pay.

Posted by Godckler | Report as abusive
 

Corporate Greed!! But what’s the need?

Posted by Pandeyprashant | Report as abusive
 

If the founding fathers were to come back and see where America is today, only one word would serve to describe it: FUBAR

Posted by lhathaway | Report as abusive
 

What nonsense! Where do you get money to pay your taxes? From your job of course. What do you do with your state income tax when you file your federal return? You deduct it. Where do mom and pop get the money to pay income taxes for their corner barber shop? They get it from their customers. Do you think any business or individual can just print money like our federal government does? Of course they can’t. If you can put your utopian anti-business agenda aside for a brief moment of reflection, you can readily see that individual consumers ultimately pay for everything, and this includes programs run or regulated by local, state, and federal governments. Here’s a news flash: There ain’t no free lunch.

Posted by John-B | Report as abusive
 

This just shows yet again the level of corruption in the US. All those people who are aware of what’s going on and they just sit back and collect their big salaries, thinking that they somehow deserve it, when all they are doing is manipulating the system in their favor and then patting themselves on the back for getting away with it.

Posted by lhathaway | Report as abusive
 

Is this also true in Canada?
I would imagine so… what’s good for the goose is good for the…Corporations, I mean people RIGHT?

Posted by Aneet | Report as abusive
 

John-B – you mentioned Mom and Pop stores collecting taxes from their customers. What if Mom and Pop used tax loopholes to the point the government gave them money instead of Mom and Pop paying? Would it be alright for Mom and Pop to charge you tax when they don’t owe taxes, thereby telling you its a tax while it actually becomes their profit? This is what the electric companies are doing, charging us for taxes they never have to pay.

Posted by Buelligan | Report as abusive
 

“Corporations are People” – Mitt Romney

Posted by zoomie63 | Report as abusive
 

Even if all the necessary steps are taken to ensure a fair tax system, what would stop these corporate entities from passing the loss onto their customers? Isn’t boosting the price of the finished product, just a circular game or a form of musical chairs? Clearly, a tax structure cannot be manipulated to enhance a products affordability. Nor can it be applied as a method to enforce social responsibility or justice. Since we can’t legislate morality, it’s time for all of us to find opportunities to approach CEO’s and their kind individually. For example; social gatherings, doorways, dinner tables, church groups and yes lawn chairs on the beach! No peace without personal responsibility to the society at large.

Posted by elmerfudzie | Report as abusive
 

Call it taxes or call it profits… ultimately the consumer pays it… and that will NEVER change.

Posted by readski | Report as abusive
 

Great analysis. No reflection on you, but, what now? The people in charge don’t even care if you know they are thieves. Politicians will be seen to be doing something about it. Investigative committees will be formed. Nothing will change. The Same ilk of people will be elected because of electoral ignorance or lack of choice. Is it possible to fix a broken system from inside the broken system? Call me a cynic!

Posted by guest_who | Report as abusive
 

“The Gangs of New York” sums it up. Money writes the laws, we pay the tab….OCCUPY!!

Posted by dackstarr | Report as abusive
 

CRIMES AGAINST THE NATION!!!

The politicians who are granting these companies this limitless flow of free money must be identified and arrested.

The companies need to be seized and all future inflows need to go into the national and state coffers.

Once all of the stolen dollars are recoverd, the units can be sold to the highest bidder.

This is a fine example of our system of graft and corruption at play…Americans need to wake up and act.

OWS…keep up the good work.

Posted by NobleKin | Report as abusive
 

Another article based on the CTJ study, this time focusing on a different sector:
http://arstechnica.com/tech-policy/news/ 2011/11/big-isps-dwell-in-tax-break-heav en-according-to-corporate-tax-study.ars

Posted by matthewslyman | Report as abusive
 

While the Tax Code is written by Corporations which can afford to own politicians who can’t read the laws written for them, lobbyists, law writing lawyers and the Supreme Court, only people, like John B, a brilliant “no child left behind” true American Patriot,could equate Mom and Pop to Corporate America…..John must be related to Clarence Thomas……

Posted by educationfan | Report as abusive
 

Why don’t U. S. corporations have to pay taxes, like U S humans, “on profits wherever earned”? Because Coporations, unlike humans, can exist in multiple jurisdictions by simply forming another “People” in each jurisdiction

Posted by educationfan | Report as abusive
 

“Under the 1986 Tax Reform Act they are exempt from paying corporate income taxes if organized as partnerships. However, under a rule from the era of President George W. Bush, federal regulators let them collect the corporate income tax anyway. That IS legalized theft.”

Partnerships aren’t subjected to a corporate level tax, as the proceeds are passed on to the individual partners and taxed as income to the individual. Any corporation’s income tax is a finite number (revenue * bracket %) as reported on their annual financial data. How are these partnerships collecting/stealing “the corporate income tax” when they have no possible number to draw from? What is it you’re accusing them of doing exactly?

In several instances, you draw on some extreme examples while leaving out crucial points in American laws. Inform your readers next time please, don’t leave out key parts the US tax code/GAAP to prove a point.

Posted by drew33333 | Report as abusive
 

What is with most of you people ??? Corporations ALWAYS pass on their expenses in their prices . . . we the consumers are the only ones who ever actually pay taxes in the end. That’s just basic 9th grade economice.

Posted by Bobo_9 | Report as abusive
 

What is with most of you people including the author of this article ?? Companies ALWAYS pass on their expenses in the form of prices . . . the only ones who ever pay taxes in the end are we the consumers. That’s just basic 9th grade economics.

Posted by Bobo_9 | Report as abusive
 

Once again, you hit the nail right on the head. Excellent research! Just gives more credence to the fact that its special laws for people with resources, and for everyone else, its the SAME. Given the system in the US, both parties are in this game pretty much the same manner – to dole out goodies to big MONEY. The only way it will change is for customers to leverage their power of CHOICE.

Posted by DarshanNellary | Report as abusive
 

@ John-B, I do hope you go back and read what I actually wrote as your post suggests you did not.

Start with the first paragraph and the point in the second.

And then ask yourself why you would be charged a tax that does not get to government or gets there years later, its value reduced by inflation.

Posted by DavidCayJ | Report as abusive
 

Nothing to see here, just unregulated capitalism. It’s their money and they want to keep it. Why you mad, bro?

Posted by HolyChrist | Report as abusive
 

Get a clue. Every penny they have comes from consumers. They “pay” their taxes out of that income. So there is no way to tax a corporation. It ALL gets passed on one way or another. Some of you people are total idiots.

Posted by RHO1953 | Report as abusive
 

People pay taxes, not corporations. Any tax on a corporation is merely passed on to the consumer, or assessed against the employee as reduced possible wages. Bobblehead.

Posted by RalphOnline | Report as abusive
 

Taxes should be an equal opportunity contribution. That is why I like Cain’s 9-9-9 plan. Everbody contributes. Let’s make it simple.

Posted by oldtaxpayer | Report as abusive
 

Taxes should be an equal opportunity contribution. That is why I like Cain’s 9-9-9 plan. Everbody contributes. Let’s make it simple.

Posted by oldtaxpayer | Report as abusive
 

I like Cain’s blatant disregard for ones sovereignty over ones body, I mean what bitch you wanted a job right? no free lunch , right ,asking for help with getting a job is code for let me touch your gentles right?

Posted by SwissMaestro | Report as abusive
 

Bobo _9 is right. Enough said.

Posted by DemetriusBaker | Report as abusive
 

NEWS FLASH! ALL corporations pass their taxes on to their customers. Taxes are factored into the cost of all products and services. Any corporation that does not figure it’s tax burden into its pricing structure won’t be a corporation for long. Idiot liberals.

Posted by KileAnderson | Report as abusive
 

Gotta give these “job creators” credit… they sure do know how to run a smooth scam while getting TEAple to support them 100% down the line.
Corporations are people? Nah. Spoil’t by years of unrealistic returns on “investment” too many boards of directors and “investors” have simply come to fully embrace and support a legalized long-con which rests firmly upon utterly warped and twisted values. After so many years of irrational returns and double-dealing honest profits are just not good enough for these types.

Posted by OneNativeSon | Report as abusive
 

Since the supreme court of the land has now ruled that corporations are persons. They should be made to pay Personal income taxes like other ordinary American persons. Tax code made easy! Obama should forget the so-called Super Committee of the Congress for balancing the budget. Just implement the Supreme Court rulling. If the corporations can make campaign contributions because they are persons, then let them fulfil their obligations like other Americans, period!

Posted by abbarick | Report as abusive
 

Given his often thoughtful approach to many issues, I am surprised that Mr.Johnston didn’t at least include a reference to comprehensive tax reform of some flavor. The code is so massive that it would take decades to fix each inequity one at a time.

This discussion has begun in earnest in the Republican primaries, and the reaction to the various, BOLD ideas that are great starting points, The reaction to these ideas answers Mr. Johnston’s question.

Any ideas of fundamental change in the tax code is greeted with derision and massive political gamesmanship. The media in particular uses any idea the strays off the reservation of tweaking the existing 100,000 page tax code to paint the presenter as wacko and extreme, with a shrill cry that it will hurt the little people. By whatever means, and for motivations I do not pretend to understand, the media is 99% in with the left wing and will shout down any attempt to help the country as a whole, even if it means ignoring changes that will benefit the poor and working class they purport to defend.

Posted by nnizy | Report as abusive
 

On other point. The title reads “you’re paying taxes”. Some 47% do not pay income tax in this country. It is unseemly for an author of Mr.Johnston’s calibre to use this manipulative approach. I expect honesty.

Posted by nnizy | Report as abusive
 

Economic 101 you dim bulb. The customer always pays. All entities pass all costs on to their customer. Business and corporate taxes are ultimately just hidden taxes on the end user. It is pointless to vilify businesses over this, but then the Statist Left need to personify a villain for the unwashed masses to hate. Continue to tax business until they cannot maintain a profit and then the money leaves to find a home elsewhere. It’s like the basic laws of physics and nature.

We need minimalist government, not a leviathan. Maggie Thatcher said it well: “Socialism is a great idea until you run out of other peoples’ money.” No more hidden gold folks. It’s done run out.

Posted by KittyWitty | Report as abusive
 

“John-B”, (Nov 9, 2011 8:59 am EST), may not have exactly addressed this particular taxation malfunction but he exactly addressed the general problem with taxing corporations.

The Code absolutely must be simplified as well as borne by every single American; be it a flat or fair or a 9-9-9 it must ASAP replace the convoluted and tortured socialist Rube Goldberg machine that’s killing entrepreneurialism and dividing Americans.

Posted by sanbornl | Report as abusive
 

@Bobo_9 said “Companies ALWAYS pass on their expenses in the form of prices . . . the only ones who ever pay taxes in the end are we the consumers”. This is a typical misunderstanding that results from trying to oversimplify what is a very complex issue. Had you stuck with your economics education past the 9th grade you’d have discovered that there are two elements in the corporate balance sheet, revenues AND expenses. Corporate management makes decisions as to how to address new expenses such as taxes and they can do so by either increasing revenues or decreasing expenses or both. To anyone who as ever been involved it is blatantly obvious that this decision is never as easy as simply raising prices. Intelligent management makes these decisions by taking current market conditions into account.

Essentially all rational economists (as opposed to the ideological ones) recognize that corporate taxes are paid by three parties: customers, employees and owners. Customers pay through increased prices, employees pay through reduced wages and owners pay through reduced return on capital, typically smaller dividends or reduced share prices. This is itself, of course, an oversimplification of the issue but it will have to do for our purposes here. Corporations expend significant efforts in their attempts to achieve optimal pricing, that is prices that maximize earnings. Any change from these prices typically reduces earnings, increasing prices reduces market share and decreasing prices reduces margin and therefore earnings. In todays market price increases are an extremely risky strategy for most any business, just ask BOA. Corporate management is typically comprised of individuals who are themselves significant shareholders in the business and these people are unlikely to pick their own pockets to pay the taxman if there are any alternatives available. So that leaves employees to shoulder the majority of the burden. The vast majority of employees in the U.S. have only one means of voicing their opposition to management decisions, that is with their feet, and very few of them are likely to exercise that option in todays market.

The government already taxes consumption (through sales and excise taxes), labor (through income and payroll taxes) and capital gains. If they desire to derive an increased portion of revenue from one of these sources they should do so directly by increasing the tax rate for that source. Corporate taxes do nothing but introduce incredible complexity (and cost) into the equation and they empower corporate management to influence, within market limitations, the source of the tax revenue.

I agree with the general premise of the article, that specifically charging customers for taxes that will either be deferred or never paid is disingenuous at best and borders on criminal at it’s worst. I think this needs to be viewed in the light of who is most likely to shoulder the burden if these companies are forced to actually pay those taxes. I think it very likely that the majority of that burden would be shouldered by the employees and disproportionately by unskilled and low skilled labor as opposed to management, professionals and highly skilled labor since the market in the latter is much tighter than that in the former. In the end it needs to be recognized that taxing corporations is just generally a very bad idea regardless of your ideological leanings.

Posted by jtfane | Report as abusive
 

You know all this corruptiveness that many corporations are condoning will all catch up with them in the after-life from this planet. Earth is only a schoolground to show your qualities or lack of Ethics for your final Home. Just because what they are doing now does not bother their conscience:: THIS WILL CATCH UP WITH THEM AT A LATER DATE.

Posted by bigbritches | Report as abusive
 

This is nothing new, companies pass the cost of taxes to the consumer. Raise taxes on these companies and our bills increase. This is always the case. With utilities however if you lower taxes, they will not lower the bills since they have been able to create a monopoly due to government regulation. Energy prices are regulated and so are these monopolies, so the correct people to blame is washingon dc. If you recall AT&T was a government approved and supported monopoly pre-breakup. The government created the monopoly, and would not allow competiton because they wanted a single system to cover all american homes. Then they decided to break the company up. What I find sad is that people blame capitalism or the free market for these situations, when this is not a free market.

Posted by TheNewWorld | Report as abusive
 

Congress should require that any money authorized by utility regulators for paying taxes that is not actually paid to taxing authorities be rebated to customers regardless of any other laws.

Enron, when it controlled Oregon’s public utility collected in its approved rates Oregon income taxes but as a subsidiary of Enron it used Enron’s losses to offset the subsidiary’s Oregon tax burden. That allowed the regulated utility to subsidize the failing energy trader at the direct expense of Oregon residents. That was immoral and is now illegal in Oregon I believe, since there is not supposed to be any mixing of regulated and unregulated businesses.

Posted by SeniorMoment | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •