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?

 

86 comments

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/

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

They create jobs, din’tcha know?
*snicker*
OWS-We are the 99%!

Posted by dXm | Report as abusive

Income taxes paid by corporations are only a shell game to hide how much you the consumer are paying in taxes. Companies don’t pay taxes, they pay expenses (which a tax is to them). This is passed on to the consumer in higher fees for their goods and services. The only good thing this does is to collect taxes from foreign customers. However, it also makes US goods more expensive. If we really want companies out of the government we should eliminate all corporate taxes. Then there would not be the incentive to lobby for tax breaks. However, it would place more burden on the regular tax payer because they would have to directly fund government spending.

Posted by TheCommenter | Report as abusive

I could understand if the oil companies pay $0 in taxes. Oil is an important commodity in the world, and increasing its cost would mean increasing cost of everything else.

However, giving the oil companies $$? That is rubbish! Why should they take my dime? Have they lowered gas prices for me?

What I am saying is that it is okay for them to earn their dollar and keep it, not take an additional 10 cents from me.

Posted by PreetSG | Report as abusive

Taxes on profits made from either regulated or “free” market products and services should be paid by the producers – they will *almost always* pass on this as a cost to consumers. In an open market a company might absorb some of the costs to remain competitive but with utilities the producers are monopolies so there’s no doubt they will pass on the cost in their rates.

That’s why there are regulators who discuss how much the rate charged is allowed to include taxes (consumption or sales taxes are over and above these producer oriented taxes and paid be the “final” consumer). If after all that things are just too expensive well there’s a bigger problem than just the accounting and taxes. Investment in more efficient production (accelerated depreciation etc) or consumption (energy saving technologies) seems the only approach to lowering costs. Better to incentivize electricity producers and users (while subsidizing an income geared tax rebate for consumers up to a certain level so they can heat their houses etc) than burying the hoped for solution in corporate conglomerate account statements. If the tax expenditure is just going to happen anyway but through a paper trail inside a conglomerate’s legal and accounting divisions, then policy makers should at least make the producers do something for it like efficiently produce more wattage per dollar input.

Posted by WarnerTiempo | Report as abusive

This is a complicated area, mainly because a regulatory framework is always going to be necessarily hypothetical.

This article makes one fundamental mistake though. Consumers are NOT loaning money to the utilities at zero interest. Rather they are paying less tax in the future as a proxy for interest on their money today.

The two tax approaches (tax payable, or tax on hypothetical profits, and deferred tax) should be NPV neutral. The firms prefer the latter approach because it ‘front loads’ tax, but consumers are no better or worse off under either approach.

Posted by JJHG | Report as abusive

I know it is a shock for the economic illiterates posting here — most of whom seem to be rabid socialists – but ALL businesses factor in “taxation” as part of the retail cost of their product.

The only real monopoly here is a GOVERNMENT MONOPOLY. It’s called the INLAND REVENUE SERVICE.

Get it? Death and taxes?

Who can one blame for such basic ignorance? How about starting with the author of this piece?

Of course, when we come to the Green Energy SCAM — things are INVERTED.

For instance, despite half a billion from TAX PAYERS, these scam artists st Solyndra (Green Is Tax People) still went bust.

Posted by Bill_Hickman | Report as abusive

I don’t think that corporate taxes our in the best interest of our economy but corporations receiving subsidies is just atrocious.

Posted by jasonjalves | Report as abusive

Good grief, people!

Corporate taxes are expenses of doing business. Any tax paid this year for last year comes off this year’s gross income before net income is even figured.

But this particular scheme, where consumers are separately billed taxes and then the company pockets those payments tells me the politicians allowing this to continue DO NOT represent MY interests. Same thing AGAIN when they do nothing to halt such a process.

At some point political graft, incompetence or stupidity needs to have jail time at risk to stop it once and for all.

Posted by OneOfTheSheep | Report as abusive

TALK ABOUT SHOOTING YOUR SELF IN THE FOOT?

Oh that’s it raise taxes on the Big Energy Companies!
You fool they don’t pay taxes as they just pass it on to
the consumer and last time I checked that’s US!

Mindless fools tax those big corporations, again they just pass it on to the consumer!
We all ready have the 2nd highest Corp Tax rate in the world, our Economy is in the tank and these Democrat fools want to raise the Corp Taxes even Higher?

Ask any Economist you don’t raise taxes in the Middle of a recession or a depression!

Posted by FLOYDINFLORIDA | Report as abusive

Thanks to the author for this startling new discovery, however, this is a pittance when compared to state and federal taxes collected on each gallon of gas sold. That number is in excess of $80 Billion annually.

Posted by Boyle | Report as abusive

So change the accounting laws!! But don’t villify if they broke no laws!! Yes, our 65,000 page tax code is a joke, 50,000+ IRS agents is a joke and the Flat/fair tax model is looking lkike a really honest and reasonable appoach about now! If they broke the law, make pay 3x, plus all cost to prosecute-no brainer!

Posted by DrJJJJ | Report as abusive

I’ve long assumed that we had all agreed that no one would ever mention this.

You mean… it’s ok to complain, but no one realized ’til now?!

Posted by moneywon | Report as abusive

Great article! There are other companies/banks/millionaires that could help the US economy as well. When this country brags on the high numbers of millionaires, there should be no excuse for the media to report “poor US economy”. There should be NO “bail-outs” for any company. US products manufactured outside our borders should pay the same tariff amounts like all business imports.

Posted by txpayer | Report as abusive

So, I pay taxes on the energy I use for my home every time I pay my utility bill to cover the taxes the Energy Company is paying.

The Energy Company puts it in their bank.

At tax time, they don’t just owe “zero” tax, they are entitled to millions in “welfare” rebates.

And my tax dollars go to pay those millions.

I’m sick of this sh*t.

Posted by JL4 | Report as abusive

” 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.”

An interesting position. It clearly comes from someone that understands microeconomics, but misses the big picture of macroeconomics. Yes it is risky in todays market for one company to raise prices, But what happens when every company in the sector is hit with increased prices. Lets assume the market sector uses a lot of crude oil like the refining industry. When the price of their raw material, crude oil, goes up by 20 percent, every refiner can easily increase the price of gasoline to cover the addition cost. Consumers have seen that time and time again over the years.

Is the imposition of a tax on an industry any different. The tax must be paid by all players. This allows them to raise their prices to cover the tax just as easily as the refiners can pass along the higher cost of crude oil.

In fact, no matter how a tax is levied on a company, the company never pays it. Other posters have noted, the company passes it along as either lower payments to suppliers, lower payments to employees, lower returns on investments, or higher prices for products. In my experience they try the price increase first.

This article shows how some companies have found/created ways to go even further. They are in effect using the tax system as a way to gain corporate welfare from the tax payer. Many have noted the system corporations use to determine prices, wages, costs, and other parameters of business is complicated. Couple this with the extremely complicated tax structure needed initially to cope with this problem and later to make the problem worse, and it is unlikely we as a society will ever solve the problem of fair income tax application. This was the intended purpose when the Income tax was devised. It would be collected from people before they receive the money so they would never realize how much their government was costing. Don’t believe me. Ask almost anyone how much income tax they paid last year. The usual answer is a few hundred dollars or “I did not pay any, I got some back.” This charade has gone on too long.

The solution would be to create a taxation system that is above board, open and measures something that everyone can see. That way every one can tell how much tax they are paying and will begin to understand what government cost. There is a proposal on the table to tax expenditure at the citizen level with rebates to everyone that effectively eliminate any taxes for those below the poverty income level. The tax would be easy to understand and collect because it would show as a percentage on every sales receipt. There would be no “hidden loopholes” because any attempt to game the system would show up on every sales receipt in the nation. It is called the Fair Tax and would go a long way to clean up all this back door corporate welfare, because there would be no complicated formula for committees to manipulate. If the sale was to the final customer the tax must be paid. If a refiner purchased a barrel of crude oil, there would be no tax because that is not the final sale. If they purchased an oil storage tank, they must pay the tax, because they are the final purchaser. Many states already have these taxes in place so they would be the logical group to handle the collection. As a side note, this would eliminate the future creation of unfunded mandates on the States. If a state felt they were being held hostage by the federal government, they could just deduct their fair share from from the collected revenue stream. Since the federal government is supposed to answer to the States and to the citizens this seem only fair. It puts the power of the purse strings where it belongs, in the hand of the States. Further, citizens could avoid the tax completely on any money they saved. This would increase savings, reduce retirement defaults and make this country more fiscally responsible because people would save and invest for themselves and since there is no tax on investment income, there would be a massive influx of capitol looking to create new jobs and new opportunities.

If this has made you curious, that a look into the Fair Tax. It would clean up a lot of our problems, reduce graft and corruption and begin to collect taxes on the underground economy in this county.

Check out http://www.fairtax.org for the details.

Posted by AphotoWizard | Report as abusive

This is a good column, but many readers don’t understand what this refers to.

This does NOT refer to the big oil companies Obama likes to bash. They are not utilities, they are C corporations, and they pay a ton of corporate tax.

Exxon and the like are not benefiting from these strategies.

This is a regulated utility and pipeline problem.

Posted by bm124 | Report as abusive

Confusing headline. The article is about UTILITIES, not energy companies. That’s a separate scam.

David, it would clear up some haziness in the story if you explained what “refunds” these are that part of the calculus. What was paid and then refunded? If the amounts were pre-paid taxes, like the employed pay in withholding or the self-employed pay in estimated tax, then the refunds are not 100% gov’t giveaways that create a negative tax rate, as the article implies, but just indicates that utilities pay little to no taxes.

Repeat: where did the “refund” $ come from? And if the $ originally was estimated tax, what did these utilities actually pay – because if they overpaid estimated tax, and received large refunds, they still may have paid something in taxes.

For the simple-minded right-wingers, this question does not necessarily invalidate the main argument in the article, that ratepayers are sending utilities $ to pay taxes with their monthly bills, and the utilities aren’t paying those taxes. That angle is as rotten as anything in the rest of the tax-scam subsystem of corporate welfare.

Posted by RogerT | Report as abusive

Per my previous question, I missed the paragraph that says the utilities actually paid an average 3.7% in income taxes over the 3 years of the study.

So, how does that translate into the negative tax rates in the graph? They paid taxes, a tiny bit, sure, effectively a criminal rate, nothing compared to the rates normal people pay — BUT that is NOT a negative rate. Apparently the math is based somehow on the 35% corporate rate as a baseline – but again, how is that a negative rate in absolute terms, when the actual rate is the 3.7% quoted?

And, what % are ratepayers paying to offset the corporate income taxes of the utilities? Compare that to the 3.7% actual tax rate, and you’ve got the magnitude of the legalized theft. That figure would be very enlightening; the negative numbers in the graph, perhaps not so much.

Posted by RogerT | Report as abusive

Because only the poor are suppose to pay taxes. Did no one get the memo back in 1980?

Why do you think we have Republicans for and their mental followers.

Posted by Kiljoy616 | Report as abusive

Why aren’t any companies? “Good” ones get a kick-back:

EXXON MOBIL: The oil giant that was the world’s most profitable corporation in 2008 has spent $5.7 million in campaign contributions over the last ten years and $138 million in lobbying expenditures. Its federal corporate income tax liabilities for 2009? Absolutely nothing. Not only did it pay nothing, but it also received a tax rebate the same year of $156 million.

CHEVRON: Chevron spent $4.4 million in campaign contributions and $91 million in lobbying expenditures over the last decade. It received a tax refund of $19 million in 2009 while making $10 billion in profits and $324 million in government contracts in 2008.

CONOCOPHILLIPS: The Texas-based gasoline giant spent $2.5 million in campaign contributions and $63 million in lobbying expenditures over the last decade. It received “$451 million through the oil and gas manufacturing deduction,” a special tax break, between 2007 and 2009, despite $16 billion in profits over the same period of time.
VALERO ENERGY: Valero spent $4.1 million in campaign contributions and $4.8 million in lobbying expenditures from 2001 to 2010. It received a $157 million tax rebate in 2009 despite $68 billion in sales during the same year. It received “$134 million through the oil and gas manufacturing deduction” over the last three years.

BANK OF AMERICA: Bank of America employees contributed $11 million to federal political campaigns from 2001 to 2010 and spent $24 million lobbying over the same period of time. It made $4.4 billion in profits in 2010 while receiving a tax refund of $1.9 billion.
CITIGROUP: Citigroup employees contributed $15 million to federal political campaigns from 2001 to 2010 and spent $62 million lobbying over the same period of time. It made $4 billion in profits in 2010 while paying absolutely nothing in federal corporate income taxes. It also received a $1.9 billion tax refund.

GOLDMAN SACHS: The mega-bank Goldman Sachs, which is often called “Government Sachs” in insider circles because of its clout over Washington, spent $22 million in campaign contributions and $21 million in lobbying over the last decade. It paid an ultra-low tax rate of 1.1 percent in 2008, while also receiving $800 billion in governmentloans to help weather the financial crisis.

BOEING: The aviation and defense contractor giant gave $10 million in contributions and $115 million in lobbying expenditures over the last decade. It paid a grand total of nothing in federal corporate income taxes in 2010 and received a $124 million tax refund.

FEDEX: FedEx spent $8.7 million in campaign contributions and $71 million in lobbying expenditures from 2001 to 2010. It paid a .0005 percent effective tax rate recently, actually spending 42 times as much on lobbying Congress as it did paying taxes. To do this it utilizes 21 tax havens.

CARNIVAL: The cruise line paid $1.7 million in campaign contributions and $1.6 million in lobbying over the past ten years. Despite the relatively low amount of money it spent influencing Washington, it has gotten away with a super-low tax rate. Over the past five years, its federal corporate income tax rate has been an effective 1.1 percent.

VERIZON: Verizon spent $12 million in campaign contributions and $131 million in lobbying expenditures over the past decade. It paid absolutely nothing in federal corporate income taxes over the past two years and $488 million in government contracts in 2008; in 2010, it made $12 billion in profits.

GENERAL ELECTRIC: General Electric spent $13 million in campaign contributions and $205 million in lobbying expenditures over the last decade while netting a tax refund of $4.1 billion over the past five years. It made $26 billion in profits over the same time period.

Americans…start your own lobby at the voting booth in 2012 and vote all incumbents out of office.

Posted by Onerioi | Report as abusive

Rubbish.

Paying employees (ect) is a cost and a deduction.

To raise fees is to increase profit and so increase the tax bases.

To pass “income tax” down to the consumer by way of fees is a circular logic fail.

Posted by torakism | Report as abusive

Why don’t we just make energy resources national, owned by the people, then we pay fair market value for them without a plethora of investors, executives and CEO’s getting their cut along the way?

Did you know gasoline prices at the pump are lowest among nations that have government run oil, and highest among nations that have privatized oil industry?

Posted by JohnSmith9875 | Report as abusive

Whether or not the negative tax payments are justified, legitimate or serve a public interest, why are the energy companies themselves satisfied with the wide discrepancy that exists as shown on the graph? The author doesn’t seem to explain that discrepancy either.

It seems to me that if lobbying gets tax breaks, it’s crooked. No individual can lobby the IRS for a better deal on taxes. As far as I know, no individual can lobby Congress either.

Posted by paintcan | Report as abusive

Quite simply, businesses don’t pay taxes their customers do. Taxes are a cost of doing business that is passed on to the customer.
Economics and Finance 101.

Posted by busterfrogg | Report as abusive

Way back in the 1950s personal income taxes were at about 8%, when the government raises taxes people go to their employer for a raise(cost of living increase). So in reality it is the employer that pays any new taxes charged to the individual. Income taxes are now around 40%, the employer has absorbed this cost not the individual. If you want corporations to start paying taxes again, remove the 40% we pay through our employees.

Posted by Deus_Ex | Report as abusive

Corporations are people and as such, are subject to personal income taxes.

Posted by GreenMarine | Report as abusive

RE: “Corporations are people and as such, are subject to personal income taxes.”

Exactly, I own 1/1,000,000,000 in XOM (Exxon-Mobile) and thus pay that my portion of their income taxes. In addition they pay income taxes to the ones I pay; we are taxes twice on the same transaction.

Posted by SirGareth | Report as abusive

Executives should not make multimillion dollar salaries. Just because somebody manages a huge portfolio doesn’t mean they deserve a chunk of it.

Congress handles a 3.7 trillion dollar budget, it doesn’t mean they deserve a 10 million dollar salary.

Posted by RickCain | Report as abusive

Sigh. Income taxes are some of the smallest of “taxes” paid by energy companies – the main “tax” is the royalties they pay – often 15-30% of every bbl is collected in royalties. Simply because these taxes are called royalties doesn’t change the fact that energy companies pay significant amount of taxes – if it walks, talks and sounds like a duck…

Posted by OracleOfMumbai | Report as abusive

Because they paid legislators to write tax policy favorable to them.

Posted by Karnac | Report as abusive

Taxation of corporations is a method of government to hide the full weight of taxation from the true payer of taxes -the individual.

Eliminate taxation of corporations and smaller businesses and raise it on the individual, or eliminate taxation of the individual and raise it on corporations and smaller businesses. To tax both is a dishonest policy.

Posted by sanbornl | Report as abusive

Exxon-Mobile alone, as a single corporation, paid total taxes in 2009, equal to half of all the income taxes recieved by the federal government. This has been true 9 of the last 10 years. This doesn’t even include royalties. To recieve a return without paying any income tax, one has to qualify for tax credits. Credits are given for certain activities government wants to incentivise, that would not occur otherwise, or that they want to occur quickly for various reasons. Public corporations are not suppose to pay income taxes, their stock holders do on capitol gains and distributions. This federal income is HUGE. The only reason there even is a corporate income tax, is that if it didn’t exist, money could be kept by the corporation tax free as a shelter for shareholders.

Anything that increases expenses for any company, ends up added to the cost of the product. This is right and just.

With a handful of exceptions, all of the stockholders of Exxon-Mobile are the so called “99 percent”. This includes any of you with a retirement fund.

No matter how it’s invested, virtually any decent portfolio, even if you’re just in target date or other mutual funds, includes XOM, other big oil corporations, utilities, tobacco, beer, treasuries, and bonds, including real-estate with subprime exposure thanks to Clinton and the Democrats. It is necessary to protect against economic bubbles, recessions, and even prosperity, since some assets decline during such times.

This means that the so called 99 percent, as a group, are the majority owners you’re griping about, including yourself. If you’re too young to have such accounts, (or trust funds), Then your parents do. In case you didn’t know, they get to vote as stockholders as well, so blame the 99 percent if you don’t like it, and that’s you.

Posted by libsrnazi | Report as abusive

You’re paying too much for that good or service you want, and you should be angry because we use NAZI propaganda class warfare retoric, (just replace the terms “corporations” and “jews”), and it is indiscernable.

Because you’re now ticked off, you should let us tax and regulate that corporation, that’ll teach them, and will be more “fair”. And that will result in lower prices…

Wait… That doesn’t make sense… Well then, Big oil is making too much profit, and you’re hurting because gas and heationg oil is too high, so we gripe about big oil profits to tick you off, and justify windfall profit taxes on just US oil companies, even though they have no control over the price of oil. That’ll teach em’ a lesson. Then the price of gas and heating oil will go down… Wait, no… I’m confused…

Or maybe people who buy into that crap are mindless puppets to a beaurcracy called the Democratic Party. Who is not only telling you how to think, but how to feel (most of all), what to say, and how badly you’ll be castigated as ignorant, stupid, racist, homophobic, sexist, and dismissable, if you even consider or question any deviation from this political party line.

Posted by libsrnazi | Report as abusive

“We ask that the government undertake the obligation above all of providing citizens with adequate opportunity for employment and earning a living. The activities of the individual must not be allowed to clash with the interests of the community, but must take place within its confines and be for the good of all. Therefore, we demand: … an end to the power of the financial interests. We demand profit sharing in big business. We demand a broad extension of care for the aged. We demand … the greatest possible consideration of small business in the purchases of national, state, and municipal governments. In order to make possible to every capable and industrious [citizen] the attainment of higher education and thus the achievement of a post of leadership, the government must provide an all-around enlargement of our entire system of public education … We demand the education at government expense of gifted children of poor parents … The government must undertake the improvement of public health – by protecting mother and child, by prohibiting child labor … by the greatest possible support for all clubs concerned with the physical education of youth. We combat the … materialistic spirit within and without us, and are convinced that a permanent recovery of our people can only proceed from within on the foundation of the common good before the individual good.”
– From the political program of the Nazi Party, adopted in Munich, February 24, 1920

Posted by libsrnazi | Report as abusive

The problem here is that in addition to what was mentioned
in this good article is that governments support these corporate entities to the hilt because they are an excellent source for fleecing the average person with myriads of fees and taxes that they can collect. Please see your utility bills and cell phone bills. It’s a lot easier to collect these funds from the average joe than from corporate entities. I also agree that it is horrendous to give these utility companies all the extra financial help which they truly DO NOT DESERVE.

Posted by loiters21 | Report as abusive

Columnist here….

@libsrnazi, the total revenues of Exxon Mobil do not even equal half of the federal income tax receipts (they run about a third as much) so your comment that the company’s taxes were equal to half of individual income taxes in nine of the last ten years is nonsense.

Others here seem to not have missed that this column dealt with legal monopolies, not competitive corporations, even though that is the opening of the column.

Monopolies UNIQUELY get to pass all costs on to customers; in a competitive market not all costs get passed on to customers and the cost of taxes, as the column notes at the start, can fall on any of four sectors: owners, workers, vendors or customers or some combination.

If a corporation can automatically pass on all of its tax costs then it is NOT in a competitive market.

Furthermore, if all companies in an industry, a competitive industry, can just pass on tax costs then why would they care so much about corporate income taxes?

@JJHG, what you describe as an error is in countless documents, including testimony, in monopoly rate cases I have been covering going back four decades.

And your math is wrong because of inflation (though if we get into a long running deflation that would change).

If I pay $1 today in my electric bill to cover the corporate utility’s income taxes and it pays that $1 over to government in 30 years the inflation adjusted value of that dollar will be less than half its instant value. Deferred taxes are not adjusted for inflation. Thus, deferrals amount to a gain to the company deferring and a loss to the consumer paying the utility and that is before getting into government borrowing against anticipated future revenues, which can make the deferral into a negative for government as borrowing costs will be higher than inflation.

Deferrals are generally treated these days as zero interest capital, but authorized rates of return have been raised so high — I have read decisions that grant utilities 18% pretax returns and in other columns shown 55% returns — that the zero interest point is weak.

As my column notes, customers generally pay higher interest rates on their debt than utilities do, so the forced loan to utilities of deferred tax dollars makes consumers worse off.

Posted by DavidCayJ | Report as abusive