Tax Breaks Don’t Boost Investment: Study

From 2001 to 2003, 25 companies with big tax breaks cut their capital investments by 22 percent, advocacy group finds.
Stephen TaubSeptember 24, 2004

In an ideal world, tax breaks provide an incentive to companies plow large sums of money into new plants, equipment, research, people and other things that could spur growth in their businesses and the economy at large.

Alas, it doesn’t work out so neatly. Or so a study of 275 profitable Fortune 500 companies by the Citizens for Tax Justice (CTJ) and the Institute on Taxation and Economic Policy (ITEP) suggests. Large tax breaks don’t necessarily move corporations to invest more, the reports authors contend.

The study found that 82 companies paid no federal income tax in at least one year during the first three years of the current Bush administration. Indeed, the companies generated so much in the way of excess tax breaks that they received outright federal tax rebates totaling $12.6 billion. In other words, they made more after taxes than before taxes in those no-tax years, the report’s authors note.

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Further, in 2002 and 2003, the 275 companies sheltered more than half of their profits from tax, according to the report. (The Web site of CTJ, a 501(c)(4) advocacy group, lists “closing corporate tax loopholes” as one of its goals; ITEP refers to itself as “a non-profit, non-partisan research and education organization that works on government taxation and spending policy issues.”)

Did companies at least use these enormous tax breaks to invest in their businesses and boost their long-term prospects? Not really, the study suggests. Just seven of the 25 companies with the largest total tax breaks from all sources over the three years increased capital investment from 2001 to 2003, according to the report.

Indeed, the 25 companies in the survey with the biggest total tax breaks cut their capital investments from 2001 to 2003 by 22 percent, on average. In contrast, the remaining 250 companies in the survey reduced their investments by 13 percent.

What’s more, just seven of the 25 companies with the largest tax breaks hiked investment over the three-year period—Citigroup, ExxonMobil, Pfizer, Altria, Wachovia, Viacom, and American Express.

The study’s authors also point out that tax laws adopted in 2002 and 2003 greatly increased corporate write-offs for accelerated depreciation and made it easier for corporations to use excess tax subsidies to trigger tax rebates, at a three-year cost of $175 billion.

Although backers of such incentives argued that they would spur corporate investment in plant and equipment, “they failed to do so,” the study’s authors note. For example, the 25 companies that reported the largest tax savings from accelerated depreciation cut their total property and plant and equipment investments by 27 percent from 2001 to 2003, according to the report. The investments of the remaining 250 companies, on the other hand, dipped by only 8 percent.

“We do not mean to imply in our report that corporate tax breaks actively discourage capital investments,” said Robert S. McIntyre, director of CTJ and co-author of the report with T.D. Coo Nguyen of ITEP. “But the evidence shows, as it has so often in the past, that business investment decisions are primarily driven by supply and demand, not by government attempts to micro-manage the economy.”

The study also found that 28 companies enjoyed negative federal income tax rates over the entire 2001-03 period. Those with large negative tax rates included Pepco Holdings (–59.6 percent), Prudential Financial (–46.2 percent), ITT Industries (–22.3 percent) and Boeing (–18.8 percent).

Half of the $87.1 billion in total tax-breaks over the three years in the companies studied went to just 25 corporations, with each garnering more than $1.5 billion.

Topping the list was General Electric, with $9.5 billion in tax breaks over the three years. It was followed by SBC Communications at $9 billion and Citigroup, IBM, Microsoft, and AT&T, each with about $4.6 billion.