Being from Indiana, and wanting to understand a bit more about Indiana State finances in this extremely tough economy, where so many Indiana citizens, as well as many citizens across the country, are suffering so much economically, I decided to perform some research on Indiana’s largest Corporation, Eli Lilly.
In a sense of full and fair disclosure, Indiana’s Governor, Mitch Daniels, is Republican. He worked for Eli Lilly from 1990 to 2001. In his stint with Lilly, Daniels was promoted to President of North American Operations in 1993-1997, and he was also promoted again to Senior Vice President for Corporate Strategy and Policy in 1997-2001….a very fast rising star at giant Big Pharma Lilly.
All of the key top Indiana State government officials are Republicans. The Indiana State Senate is also dominated by Republicans. In the Indiana State House, the Democrats have a very slight edge….52 to 48.
Here’s what I discovered from my research of Lilly.
All Hoosiers are aware of how successful Indy-based Big Pharma Multinational Corp Eli Lilly has been. Over the past dozen years, Lilly has generated an amazing $37.0 bil of total worldwide consolidated pretax income.
What many Hoosiers probably aren’t aware of is how Lilly has fared in helping Indiana solve its State budget crisis….well, not so well. In these same past dozen years, how much has Lilly paid in total corporate state income tax? Well, in eight of those twelve years, Lilly paid nothing in state corporate income tax, instead it got corporate state income tax refunds.
And when you combine all twelve years, the total state income tax Lilly has paid nets to a negative $15 mil. Or in other words, Lilly has gotten total state income tax refunds of $15 mil in the same twelve year period that it earned $37.0 bil in pretax income. Indiana has to be the bulk of these total net state income tax refunds, since Lilly’s US operations are so heavy in Indiana.
So what is a fair amount of State Corporate Income Tax for Lilly to have paid on this $37.0 bil of worldwide consolidated pretax income? Well, without researching the Indiana corporate tax rate for each year, if I just use the current Indiana corporate income tax rate of a flat 8.5%, and multiply it by the $37.0 bil earned by Lilly in the past twelve years, I get an unbelievable $3,145,000,000…yeah, that’s $3.1 bil….and that’s just for one Indiana large Corp.
To balance the Indiana State budget, instead of wisely correcting this massive State of Indiana corporate tax loophole problem, the Indiana State Government has instead decided to lay off all of these state employees, including many educators, and they have also raised tuition of Indiana’s public universities, and they have also squeezed the costs out of so many excellent State programs.. Give me a break! That makes no sense.
With some of those $3.145 bil of additional State funds, Indiana could do some really great things like giving very healthy tax incentives to small and medium-sized Indiana businesses in order to bring down the horribly high Indiana State Unemployment Rate, like reducing tuition at State Universities, like sprucing up both K-12 and higher public education even more with wise initiatives, like investing even more in our already strong, but clearly overstressed police and fire departments, like making some wise green energy investments, like reducing property and sales taxes, like reducing the State individual income tax rates, like reducing the 8.5% corporate state income tax rate, and still having enough left over to significantly enhance the State’s Rainy Day Fund.
I really can’t understand how the State of Indiana thinks that in balancing its budget, it is permissible to cut all of these key state jobs, like ones in the critical area of education, instead of closing all of these State Corporate Tax Loopholes that let’s big corporations like Lilly get off Scot-free, where at the same time, so many Indiana citizens are suffering so severely economically. That's just not right, and Indiana citizens have every right to be outraged.
When you think of all the state services provided to Lilly, to its Board of Directors, to its executives, and to all of its employees, like education, state protection, and many other key services, you have to wonder why Lilly thinks it is perfectly OK to not have to pay any corporate state income taxes to the State of Indiana for these very valuable services it has received. And it’s not just Lilly. Many large Multinational Corps all over the country are following Lilly’s state corporate income tax avoidance footsteps here.
From an extensive review of Lilly’s past SEC annual report filings, on the very positive side, here is Lilly’s worldwide consolidated pretax income by year, for the past dozen years:
All in millions of dollars
2009…..5,358
2008….(1,308)
2007…..3,877
2006…..3,418
2005…..2,718
2004…..2,942
2003…..3.262
2002…..3,458
2001…..3,507
2000…..3,859
1999…..3,245
1998…..2,665
Total….37,001 (yeah, that $37 bil)
And then on the really negative side, here Lilly’s total corporate state income tax paid (received) in each year, for the last dozen years, from its SEC income tax footnotes:
All in millions of dollars:
2009…..49
2008….(45)
2007…..28
2006….(25)
2005…..12
2004….(11)
2003…...(6)
2002….(13)
2001…..17
2000…..(7)
1999…..(5)
1998…..(9)
Total….(15) (yeah, that’s a net state tax refund of $15 mil)
So, how do we correct this massive problem?
I think the single most important thing to do is remove the Big Corp too friendly Republican dominance in both the State of Indiana executive and legislative branches of government. They are letting large Corps like Lilly get away with bloody murder.
The Indiana Governor spot is not up for election in November 2010. Thus, for quick maximum effect, what single office needs to switch from Republican to Democratic control to best close these State Corporate Tax Loopholes enjoyed by Big Multinational Corps? Clearly, it's Pete Buttigieg replacing Richard Mourdock as Indiana State Treasurer.
Buttigieg is uniquely very financially astute. This guy studied Economics for three years as a Rhodes Scholar in Oxford, England. The only other Rhodes Scholar in Indiana is Republican US Senator Richard Lugar, and look how incredibly effective he has been in the US Senate for so many years, particularly in foreign affairs. And like Buttigieg, Lugar also studied Economics at Oxford.
To deal with very complicated financial matters, like closing very involved State Corporate Tax Income Loopholes, you need people in office who can keep up intellectually with the very brilliant, greedy financial minds of Big Corps and their also very financially savvy lobbyists….Pete Buttigieg is your man here. The State of Indiana is presently no match for the financial savvy of Big Corps operating here. When you study this issue in depth like I have, it is pretty clear that the State of Indiana has been very far behind the curve on closing inappropriate State Corporate Tax Loopholes. Many other states have been very successful in this endeavor, and these states’ finances have improved dramatically from these efforts.
To further strengthen the State’s weak hand in dealing with financial matters like the problem of Big Multinational State Corp tax loopholes, it would be really helpful if the State substantially beefed up its financial oversight by also electing Democrat Sam Locke as State Auditor. It also amazes me how incredibly inaccurate the projections of Indiana State Tax Revenues have been for many years, both in good times and bad times. Much wiser decisions will result if these State tax revenue projections can be substantially improved. I think Sam Locke can really help here.
So that’s a brief insight on Indiana’s State finances. Given my incredible findings on Lilly, I decided to expand my research from Lilly to the 30 Dow stocks to see just how pandemic this State Corporate Tax Loophole problem is.
Of the 30 Dow companies, from income tax footnotes in SEC filings, I was able to find 28 of them that disclosed either their state income tax paid in each year, or a combination of state income tax and local income tax paid in each year.
The two that didn’t give this key state tax paid breakout were JNJ and AT&T. The JNJ decision not to provide this disclosure seemed really strange to me, given that JNJ has a SEC State Location in New Jersey, which presently has a huge 9.0% state corporate income tax rate.
Anyway, below here is the effective state corporate income tax paid rates for the last six years in total for these 28 Dow companies. These effective state tax rates paid are computed by dividing the current state tax paid by the consolidated pretax income. Some pundits might call this a Race to the Bottom, or which Dow companies can pay the less state taxes. Well, it looks like Dupont won this Race to the Bottom, but it was a blanket finish, with an amazing 12 of the 28 Dow companies paying an effective state tax rate below 1.00%.
…………………….....Current………………….......State
…………………….......State...Consolidated…Effective
…………………….......Tax……….Pretax………....Tax
…………………….......Paid……..Income………..Rate
……………….….......(Millions of Dollars)
Home Depot………..1,862…….40,694……..4.58%
Verizon……………...2,804…….66,606……..4.21%
JP Morgan Chase…2,968…….79,226……..3.75%
Bank of America….3,952….107,073……..3.69%
Disney…………….....1,247…....33,958……..3.67%
Cisco Systems……..1,546….....52,493…….2.95%
Kraft………………….....654……..22,540…….2.90%
Walmart……………..3,298…....115,945…….2.84%
McDonalds…………....638….....27,258…….2.34%
Merck……………......1,033……..50,304…….2.05%
American Express….523……...25,523…….2.05%
Pfizer……………….....1,121……..67,030…….1.67%
Procter & Gamble…1,157……...81,449…….1.42%
Chevron……………...2,435…….171,583…….1.42%
Coca Cola………….......523………43,861…….1.19%
GE………………….......1,383…….125,267…….1.10%
Caterpillar…………......213………21,529…….0.99%
Microsoft………….....1,212……..123,639……0.98%
United Technologies..310……….33,194…….0.93%
Exxon Mobil……......3,196…….357,728……0.89%
3M…………………..........235……….30,611…….0.77%
IBM…………………........604……….85,554…….0.71%
Boeing……………….......127….......19,817…….0.64%
Intel………………….......306….......52,651…….0.58%
Hewlett-Packard……...198…......43,995…….0.45%
Alcoa…………………........32….......11,651…….0.27%
Travelers……………........39………23,985…….0.16%
Dupont……………….........10………16,652…….0.06%
Total all 28……….....33,626…1,931,816…….1.74%
Clearly, the large Dow companies are coming out like bandits on the State corporate income tax paying front. They are doing not quite as well as Eli Lilly, but they still are doing very well. But then, this is at the clear expense of severely suffering State citizens, all throughout the country. And incredibly, there are many Republican Governor and other Republican candidates who are running on reducing the State Corporate Income Tax Rate for Big US Corps. That's crazy...they are now paying so little in State Corporate Income Taxes.
I think one reasonable way of computing what a fair State tax these Dow companies should be paying is to compare the current State Corporate Income Tax Rate where the SEC says these companies are located, multiply that by Consolidated Pretax Income, and compare this result with what state income tax they actually paid. Granted, using the current tax rate is a shortcut, instead of researching the actual corporate tax rate in each year, but it still should provide a decent perspective.
In doing this, four of these 28 Dow companies must be removed. Boeing and Microsoft both have a SEC State Location of Washington, where there is no State Corporate Income Tax presently, although I think this might be now under consideration by some in Washington. Also, Exxon Mobil has a SEC State Location in Texas, which also doesn’t have a State Corporate Income Tax presently. And lastly, Procter & Gamble is based in Ohio, which now has a Gross Receipts Tax rather than a State Corporate Income Tax.
Anyway, here is a summary of the remaining 24 Dow companies:
…………………………………...........State……......State…….Resultant
………………….........SEC….......Corporate…Effective.......Higher
………………….........State…………..Tax……..Tax Rate…...State Tax
………………..........Location………Rate……....Paid…....Last 6 Years
…………………………………………………...................(Millions of dollars)
Chevron…………........CA…………8.84%.......1.42%..........12,733
GE………………….........CT…………7.50%.......1.10%............8,012
IBM……………...........NY………...7.10%.......0.71%............5,470
Intel……………...........CA…………8.84%......0.58%.............4,348
Walmart…………….....AR………...6.50%......2.84%.............4,238
Hewlett-Packard.......CA………...8.84%......0.45%.............3,691
Pfizer……………….......NY………..7.10%......1.67%.............3,638
Merck………………......NJ…………9.00%......2.05%.............3,494
Bank of America.......NC………..6.90%......3.69%..............3,436
Cisco Systems…........CA………..8.84%.......2.95%.............3,094
3M…………………........MN……….9.80%.......0.77%............2,765
JP Morgan Chase…....NY……….7.10%.......3.75%.............2,657
Travelers……………....MN……….9.80%......0.16%...............2,312
United Technologies..CT………..7.50%......0.93%.............2,180
Coca Cola………….......GA………..6.00%......1.19%..............2,109
Verizon…………….......NY………..7.10%......4.21%..............1,925
Disney………………......CA………..8.84%......3.67%..............1,755
Dupont……………........DE………...8.70%.....0.06%..............1,439
Caterpillar…………......IL…………7.30%......0.99%..............1,359
McDonalds………….....IL…………7.30%......2.34%...............1,352
American Express…..NY………..7.10%......2.05%..............1,289
Alcoa………………........PA………...9.99%......0.27%..............1,132
Kraft………………..........IL…………7.30%......2.90%.................991
Home Depot………......GA………...6.00%......4.58%................580
Total all 24…………………………………………………................75,999
Yeah, that is indeed $76 bil of additional State Taxes Paid in the past six years, if all Corporate State Tax Loopholes would have been closed, and that amount is just for these 24 Dow companies. And look how huge the impact is in California. There are five California companies listed above, and the resultant higher state taxes paid would have been $25.6 bil, more than a third of the total for all 24 companies.
If I can get some time, I’ll later expand this key research to include perhaps 40 or 50 of the largest non-Dow companies.
US Big Corps keep complaining about all the uncertainty they are faced with under the Obama Administration. I think a big part of this uncertainty is the chance they will now get caught at some of their shenanigans, such as all of the Corporate Tax Loopholes they are taking advantage of. These US Big Corps didn’t have to worry about this during the laissez-faire Bush/Cheney Administration. Now they do, and they are scared…as well they should be. And this research study shows that it is not just massive Federal Corporate Tax Loopholes they are using, but also huge State Corporate Tax Loopholes too.
Many perceptive, visionary Democratic State Governors, like Ed Rendell in Pennsylvania and Brian Schweitzer in Montana, just to name two of the many, are now clearly aware of these State Corporate Tax Loopholes. They are going after closing them aggressively, but as expected, there is this incredible push back by these well-heeled Big US Corps and their very influential lobbyists. The Republican State Governors, and those Republican Governor candidates running for office in November 2010, are sweeping this key State Corporate Tax Loophole issue under the carpet, hoping their State citizen voters won’t catch them on what their position is on closing these massive State Corporate Tax Loopholes.
The best way to close these State Corporate Tax Loopholes, and thus relieve some of the pressure on State Budgets and also to help financially desperate State citizens, is to elect Democratic Governors….it’s that simple. The Republican Governors and Republican Governor candidates strongly support Big Corporate State Income Tax Loopholes used so extensively by Big US Corps.
I think there are some very perceptive, visionary Democrats, running now for both State and Federal offices in November 2010, who are perceptively touting for the Federal Government to assist State Governments in helping them close some of these State Corporate Tax Loopholes. The issues are so complex here, and frankly many States don’t have the financial expertise to compete with the very crafty, brilliant Big US Corps, their bright financial advisors, and their financially savvy lobbyists. Because the bucks are so large here, and because State citizens will be helped so much, I am sure the States and their citizens would really appreciate the Federal assistance.
I don’t think the problem here is that these State Corporate Tax Loopholes are being used by small and medium-sized corporations. Instead, I think the entire problem here is with the very large US Corps taking huge advantage of these State Corporate Tax Loopholes, at the severe expense of State citizens. I think it would be a much wiser strategy for States to close these State Corporate Tax Loopholes, and then use the cash proceeds to fund very healthy tax incentives for small and medium-sized businesses to create many decent jobs, in order to bring the horrific unemployment and underemployment rates down.
