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Business shoulders less of tax burden

In truth, corporate taxes are just a small piece of government revenue to begin with.

By KRIS HUNDLEY

© St. Petersburg Times,
published September 11, 2001


Corporations are expected to pay the federal government 28 percent less in taxes this year than they did in 2000.

That may not be surprising to people who will pay less on their own taxes this year because they're out of work or have lost money on investments. But the kicker is this: Corporations don't shoulder that much of the tax burden even in good times, and their taxes don't spike as high as might be expected during a boom.

During the late 1990s, when the stock market and the economy were riding an unprecedented high, many companies were losing money. Or they were plowing cash into technology, expansion or research and development, generating big tax write-offs. The result: lower tax liability.

For example, Digital Lightwave Inc. of Clearwater, No. 1 on the annual Times 50 ranking of local companies based on profitability and return to shareholders, paid only minimal taxes in 1999 and 2000, its first full year of profitability. Thanks to past operating losses and deductions, the company that makes fiber-optic testing equipment has tax losses that it will be able to carry forward to offset earnings for several years to come. Such ongoing tax benefits from previous losses are perfectly legal and quite common among corporations with high start-up costs.

"We figure it will be two to three years before we burn out our NOL," or net operating losses, said Steven Grant, Digital Lightwave's chief financial officer. "We'll still be paying an alternative minimum tax of several hundred thousand dollars, but it won't be at the corporate rate of 38 percent. It will be a much smaller number."

In the world of taxes, when times are good, corporate contributions to state and federal revenues may see a slight uptick. When times are bad, watch out.

Taxes on corporations are just a small portion of state and federal revenues, far outweighed by the money that's paid by individuals in the form of income, capital gains or Social Security taxes. The lion's share of the money that runs government programs, more than 80 percent, comes from the pockets of individuals.

Corporations, on the other hand, typically contribute about 10 percent of federal revenues and about 8 percent to the state of Florida's coffers.

"Corporate tax receipts are pretty small potatoes and they alone cannot alone throw us into deficits," said Lee Sheppard, contributing editor of Tax Notes, a weekly tax journal. "But they're taking a big a-- hit because we're going into a recession."

That became painfully clear in late August, when the Congressional Budget Office (CBO) revised its federal budget surplus downward, to $153-billion from a May estimate of $275-billion, due in part to lower corporate profits.

The state also is revising its estimate of Florida's budget surplus. A panel that will make the call is expected to meet this week to update the figure.

In 1996, corporate tax receipts were about 11.8 percent of total federal revenues. In 1999 and 2000, as companies took deductions for major technology investments, that percentage declined to just over 10 percent. In fiscal 2001, which ends Sept. 30, CBO expects corporate tax revenues to drop to 7.4 percent. That is out of total projected revenues for 2001, including Social Security and Postal Service funds, of $2.011-trillion, compared with $2.025-trillion in 2000.

For this fiscal year, corporate tax receipts are expected to drop to $149-billion, compared with $207-billion in 2000, according to CBO. The reasons range from the obvious to the obscure to the opportunistic.

About $33-billion of that decline is due to a bookkeeping item written into the tax bill passed by Congress in May. Under that bill, corporations were told to shift some payments scheduled for 2001 into the next fiscal year.

"It shrinks this year's surplus but boosts next year's surplus," said Scott Hodge, executive director of the Tax Foundation in Washington, D.C. "Congress used to do this with spending all the time. It's a gimmick."

In fact, CBO estimates that corporate tax receipts will rebound to 9.8 percent in 2002, thanks in part to the one-time accounting trick.

Unfortunately, it's not just fancy bookkeeping that's driving down corporate tax receipts for the current fiscal year. All things being equal, lower profits translate to lower taxable income.

Jeffery Howells, chief financial officer at Tech Data Corp. said the Clearwater company's taxes will be down from the $96-million set aside last year.

"Our year-to-date sales are down 11 percent, so our earnings are down and clearly the taxes will be down," he said. "In addition, in the quarter ended July 31, we did take a special one-time charge of $20-million, so that will have an impact."

Tech Data's write-off for certain software and Internet-related investments is peanuts compared to the tax deductions being taken by corporations, large and small, as they undertake major restructuring. Lucent Technologies Inc., for instance, has taken pretax charges of $3.4-billion for the first nine months of the year as it struggles to survive. During the same period, Lucent lost $7.3-billion.

Executive stock options that drop in value or become worthless in a declining stock market also can have an impact on a corporation's tax liability.

When an executive exercises a stock option in a rising market, the company that issued the option gets a benefit in the form of a higher wage deduction. If the options are worthless and the executive's total compensation is less, the company has lower deductions.

Joel Friedman, a senior fellow with the Center on Budget and Policy Priorities in Washington, D.C., said it is notoriously difficult to project a corporation's taxable profits because so many elements affect the bottom line.

"Profits are the residual income in the economy," he said. "They're what remains after all the productive inputs are compensated, so they tend to vary more over time."

Still, Tax Notes' Sheppard said the abrupt drop in corporate tax receipts should take no one by surprise.

"People watching early indicators have been seeing this train coming down the tracks," Sheppard said. A growing number of syndicated loan defaults and bankruptcy filings are two sure signs of an economic downturn, she said.

In fact, Sheppard expects that many corporations being liquidated will have just one asset of interest to buyers: tax write-offs in the form of big net operating loss carry-overs. "I expect there will be lots of fights over whether buyers are allowed to use these carry-overs (against their profits)," she said.

Other signs that Sheppard says signal lower corporate taxes in coming years: a growing number of bad loans that will turn into deductible losses for banks; fewer cars rolling off the line at auto manufacturers meaning lower income; and slowing retail sales.

"I don't know how fast the bad news is going to come," said Sheppard, who characterizes the downturn as a typical business cycle. "But we're not at the bottom of anything yet."

- Kris Hundley can be reached at hundley@sptimes.com or (727)892-2996.

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