After reviewing and analyzing literally thousands of large publicly-held company financial statements and footnotes in their annual SEC filings, it is pretty clear to me that the best way to balance all of the severely-stressed US State Budgets is to simply focus on narrowing the huge difference between what Big Corps report, and what in all fairness they should be reporting, as their taxable income to individual US States.
There are many aspects to narrowing this Corporate Income GAP. Let me first focus on Multinational Corps and their US Income and their Foreign Income. Later I'll address other strategies to narrow this Corporate Income GAP, that is devastating US State Budgets, and also the US Federal Budget, for that matter.
Obviously, the higher the portion of Worldwide Pretax Income which gets included in US Pretax Income, the higher the US State Corporate Income Tax Paid.
I did a quick study of the larger Big Multinational Corps. Unfortunately, there are more than a few that do not disclose their US Pretax Income either directly or indirectly, even though they have very significant foreign operations. I really don’t understand why these Multinational Corps are deciding to evade financial transparency, and I also don’t understand why their external auditors, and also the SEC, don’t act responsibly here. As an aside, why give the SEC and IRS more funding, when their execution is so ineffective now? Why throw good money you don't even have at something bad? Anyway, these Big Multinational Corps are excluded below.
On the positive side, here are the very favorable GAPs to both the US Government and to the US States, where the Big Corps Percentage of Worldwide Pretax Income generated in the US (US Profit Mix) significantly exceeds their Percentage of Worldwide Revenues generated in the US, or to external US customers, (US Revenue Mix) in total for the three years 2007 through 2009:
..................................Three Years 2007 through 2009........
………………………………………………………….....................Favorable
..............................US Profit Mix...US Revenue Mix.......GAP
Texas Instruments………72%..................12%..................60%
Intel………………………...70%..................15%..................55%
Applied Materials..........54%..................12%..................42%
Qualcomm………………....44%....................7%..................37%
Visa………………………......90%..................58%..................32%
Biogen IDEC..................77%..................53%..................24%
Harley-Davidson*..........94%..................72%.................22%
News Corp……………….....73%..................52%.................21%
Halliburton....................61%..................41%..................20%
Campbell Soup...............90%..................71%..................19%
Procter & Gamble…….56%..................38%..................18%
Disney............................93%..................75%..................18%
IBM………………………......52%..................36%..................16%
American Express……84%..................69%..................15%
PPG Industries................63%..................48%..................15%
McDonalds…………….....49%..................35%..................14%
Gilead Sciences…………….65%...................52%..................13%
Mosaic............................57%..................45%..................12%
Illinois Tool Works..........54%..................43%..................11%
Monsanto.......................65%...................54%..................11%
Johnson Controls*.........47%...................37%..................10%
Becton Dickinson............55%..................45%..................10%
3M………………………….....47%..................37%..................10%
United Parcel Service…...86%..................76%.................10%
Viacom…………………….....81%..................72%...................9%
Colgate Palmolive……...…32%..................24%...................8%
Kimberly Clark……………..61%..................53%...................8%
Oracle…………………….......50%..................43%...................7%
McGraw-Hill...................78%..................72%...................6%
Deere..............................61%..................55%...................6%
* On Wisconsin! On Wisconsin!
Companies in BOLD above are ones in the top 50 in Total Core Pretax Income for the past 12 years. There are 30 Big Corps in the above list, with 6 of them in the Top 50, including #9 IBM.
The above Big Multinational Corps should be the ones the Obama Administration and all of the US States should be touting as the Patriotic Champion Big Corps. To explain it simply, using Intel as the prized poster child company, Intel does its Research and Development mostly in the US, manufactures its product mostly in the US, and then sells a very high percentage (85%) of these US manufactured products overseas. A substantial portion of Intel's profit is income taxed in the US (70%), by both the US Federal Government and by US State Governments. End result, the bulk of the related jobs are in the US and the bulk of the corporate income tax receipts are in the US. This is a great outcome for both US jobs and for the US Federal and State Government Financial Coffers.
However, substantially overwhelming these Big Multinational Corps with very favorable GAPs, like Intel, are the many more, and also so many just gigantic, Big Corps that have very unfavorable GAPs to both the US Government and to the US States, where the Big Corps Percentage of Worldwide Pretax Income generated in the US falls significantly short of their Percentage of Worldwide Revenues generated in the US, or to external US customers, in total for the three years 2007 through 2009:
..................................Three Years 2007 through 2009.........
…………………………………………………………...................Unfavorable
.................................US Profit Mix..US Revenue Mix......GAP
Morgan Stanley.........(208)%................56%...............264%
Schering-Plough(07-08)(143)%................33%...............175%
Marsh & McLennan.........(75)%.................47%...............122%
Hess……………………..........(12)%.................81%.................93%
Ingersoll-Rand plc*.........(33)%................59%.................92%
Whirlpool........................(33)%................50%.................83%
Eaton................................(5)%................60%.................65%
Forest Labs........................34%................98%.................64%
Pfizer…...……………..........(17)%................45%.................62%
Dow Chemical..................(23)%................33%.................56%
Tyco International, Ltd*.....7%.................48%.................41%
Nabors Industries, Ltd……..7%..................60%.................53%
Murphy Oil…………….........23%..................75%.................52%
Marathon Oil……………...43%..................90%................47%
Alcoa................................11%...................54%................43%
Eli Lilly………………….......13%...................55%................42%
AES……………………...........(22)%.................19%.................41%
Bank of America………..49%...................87%................38%
Dell……………………...........15%...................53%................38%
Fortune Brands................33%...................70%................37%
Abbott Labs…………........12%...................49%................37%
Amgen…………………........42%...................79%................37%
Cooper Industries plc.......33%...................69%................36%
Noble Energy………….........22%...................56%................34%
Cummins...........................11%...................44%................33%
JPMorgan Chase………...43%...................74%................31%
Baxter…………………...........11%....................42%................31%
Cisco Systems…………....21%....................51%................30%
GE…………………….............19%....................48%................29%
Merck…………………..........28%....................56%...............28%
Medtronic………………........34%……………......61%................27%
Avon Products.................(7)%...................20%................27%
Freeport McMoran*...........9%....................36%................27%
Southern Copper................0%....................26%................26%
Prudential Financial*........45%....................71%...............26%
Apache…………………..........14%....................40%...............26%
Ebay……………………...........21%....................47%...............26%
Owens Illinois....................0%.....................25%...............25%
Seagate Technology*..........5%....................29%...............24%
McKesson.........................69%....................92%...............23%
Cardinal Health................77%....................99%...............22%
Chevron…………………......21%....................43%...............22%
Tyco Electronics, Ltd*........8%....................28%...............20%
ConocoPhillips…………..48%....................68%...............20%
Paccar..............................17%....................36%................19%
Masco...............................58%...................77%................19%
International Paper*........60%...................78%.................18%
Stryker.............................46%...................64%.................18%
Microsoft………………......40%....................58%................18%
Bristol Myers Squibb…44%....................60%................16%
ExxonMobil……………....14%....................30%................16%
Accenture……………….......20%....................35%................15%
Weatherford Intl, Ltd……..17%....................32%................15%
Franklin Resources...........52%....................66%................14%
Yum Brands......................32%...................45%.................13%
Parker Hannifin................45%....................58%.................13%
Occidental Petroleum.51%....................63%.................12%
Anadarko Petroleum……..70%....................82%.................12%
Covidien plc.....................45%....................56%.................11%
Newmont Mining……….....17%....................28%..................11%
Cameron International.....39%...................50%..................11%
Air Products & Chemicals.36%...................46%..................10%
Western Union.................11%....................21%..................10%
Apple…………………….......39%....................49%..................10%
JNJ………………………........41%.....................51%..................10%
Nike………………………........32%....................42%..................10%
Praxair............................34%....................43%....................9%
Computer Sciences..........53%....................62%....................9%
Bunge, Ltd.......................15%.....................24%....................9%
Duke Energy……………......82%.....................91%....................9%
Rockwell Automation......41%.....................50%....................9%
United Technologies..43%.....................51%....................8%
Mead Johnson Nutrition..31%.....................39%....................8%
State Street Corp…………...58%....................64%....................6%
DirecTV...........................83%....................89%....................6%
* For just the two years 2007 and 2009.
Companies in BOLD above are ones in the top 50 in Total Core Pretax Income for the past 12 years. There are 75 Big Corps in the above list, with 21 of them in the Top 50, including #1 ExxonMobil, #2 GE, #3 Chevron, #4 Microsoft, #6 Bank of America, and #7 ConocoPhillips.
When you review the extensive second list above showing the Big Corps with significant Unfavorable GAPS, two industries are particularly prevalent: Big Oil and Big Pharma.
US States, and also the US Federal Government for that matter, should be asking the US and Foreign Big Oil Corps for precisely the details of their highly unusual breakdown between US and Foreign Pretax Income, as shown in their annual report footnotes. I think there is something strange going on here between how this Pretax Income is being allocated between the US and Foreign. And I also think the US Federal Government should consider wise legislative measures to narrow this extremely Unfavorable Big Oil Corporate Income GAP. And if the US Federal Government refuses to act here, then I think US States should consider taking their own legislative measures to ensure that Big Oil includes a fair amount of its Worldwide Income allocated to the US.
I also think the US Federal Government should close many of the Big Oil tax loopholes, particularly Percentage Depletion, 100% tax expensing of Intangible Drilling Costs, LIFO Inventory, and the Domestic Production Activity Tax Deduction. And when this happens, US States will also be receiving a substantial increase in Big Oil Corporate Income Tax Receipts. And if the US Federal Government refuses to act on closing these massive Big Oil tax loopholes here, then I think US States should consider taking their own legislative measures to do so.
Big Pharma obtains massive tax benefits from their shifting of income to low-taxed countries. Just think about how unfair and just crazy the following situation is....A typical Big Pharma Corp does a substantial portion of its Research and Development on new drugs in the US, gets a US federal and US state income tax deduction for these R&D costs, and also a US R&D tax credit, to boot. Then after drug discovery, it transfers the intellectual property (the drug compound) to a foreign tax haven, like Puerto Rico and Ireland, where the drug is manufactured, and thus the massive amount of profit is recognized in this tax haven. And then a good chunk of the manufactured drugs are sold to US customers, some of whom even live very close to where the R&D was performed on the drug in the first place. What a Roundhouse transaction!
But after this Roundhouse transaction goes full circle, when Uncle Sam and the US States put their hands in their pockets, they find no corporate income tax receipts. In fact, they both gave income tax deductions to the drug company for the R&D costs, and also granted R&D tax credits, but tax havens like Puerto Rico and Ireland are where the massive profits from the drug are located, and income taxed at an incredibly very favorable income tax rate, and particularly so in Puerto Rico.
And now these Drug companies are lobbying the US heavily to be able to repatriate, at a very favorable US tax rate, all of their very low-taxed foreign earnings, which are now parked in their foreign tax havens.
Gosh, I call this just flat out piling on. The US Federal Government and the US States are under severe financial stress and they let these Big Drug companies get away with avoiding so much in corporate income taxes.
Clearly, from a fairness standpoint, something needs to be done here.
First, when the intellectual property is transferred to the foreign tax haven, it is only reasonable that this intellectual property could be worth a fortune, and thus there should be a substantial US income tax on the gain from transferring this property to the tax haven where the drug is to be manufactured. And then the corporate income tax receipts from that gain should substantially increase the financial coffers of both the US government and the US State governments.
Second, in a drug Roundhouse transaction, where a US drug company does the drug research in the US and then the resultant drug is manufactured in a foreign tax haven, and then subsequently sold back to the US, I think there should be some kind of a tax or import duty shared by the US government and the US State government on the drug sold to the US customer.
Third, I think Advertising Costs incurred by Drug companies should not be 100% tax deductible in the US in the first year. Instead, I think they should be amortized over at least a several year period. After all, the patent life on the drug is typically pretty long. And besides, when you think about it, what you have is all of the drug profit recognized in the foreign tax haven, so why should the drug company be allowed any income tax deduction for Advertising the drug in the US, where there's little or no profit recognized from the drug?
Fourth, there appear to be many costs incurred by Big US Drug companies that are presently deducted in the US, but which are related to specific drugs, whose profits are recognized in foreign tax havens. One example here are the costs to defend the US Drug Company against lawsuits related to a specific drug, which is manufactured in a foreign tax haven. I think there is a serious mismatch here. I don't think it make any sense to allow a US income tax deduction on a drug, which has nearly all of its profit recognized in another tax jurisdiction, in this case a foreign tax haven.
Fifth, normally I wouldn't allow any favorable tax benefit from foreign earnings repatriation. The Multi-national Corp knew the tax rules on the front end, but it still decided to manufacture the product in a foreign tax haven, knowing that if it later wanted to repatriate its foreign profits, there would be a 35% US federal income tax, plus typically also a State income tax.
However, since this US jobless recovery is so severe, and coupled with the just horribly high and very volatile Energy Costs, I think I would allow a one-time somewhat discounted foreign earnings repatriated tax rate, assuming there is a like amount of money invested by the Corp in the US in either R&D, in Renewable Energy Investments, in Energy Efficiency Building Retrofit Investments, or in clearly new Job Creation, like the building of a new manufacturing plant, or the substantial remodeling of an existing manufacturing plant.
And sixth, I think the US Federal Government needs to hire a cadre of the very best Multi-State Tax Experts it can get. The US States are no match for the multi-faceted State Corporate Income Tax Arsenals of the Big Multi-national Corps. Among other things, these State Tax Experts hired by the US government should advise the US States on the necessary steps to insure that the States will maximize their State Corporate Income Tax Receipts from any Multi-national Corp's Foreign Earnings Repatriation.
And it's not just Big Oil and Big Pharma, as you can see from the earlier list of Big Corps with huge Unfavorable GAPS in US Profit Mix vs US Revenue Mix. Many of the same points I made earlier about narrowing this GAP would apply to Multi-national Big Corps in other US industries, as well. It's all about the allocation of revenues and expenses between the US and Foreign.
I would be particularly vigilent in focusing on the appropriateness of Transfer Pricing being used on inter-company transactions between the US companies and their foreign affiliates. And the same goes for foreign-owned Big Corps and their Transfer Pricing with their US affiliates. When you have such huge Statutory Tax Rate differences between the US and the foreign tax havens, it only makes sense that Multi-national Corps would try to game the system. The potential economic rewards to them are just too huge. Reported Earnings drive stock prices, and also drive Executive Bonuses and Stock Option Grants.
But once you get the US Income vs. Foreign Income corrected, you still need to focus on the US Income allocation among US States. When you review purely domestic Big Corps, the actual state income tax rate being paid by many of them is just so incredibly low.
Just look at the Big Two purely domestic Big Corps in US Health Care: Minnesota-based United Health Group and Indiana-based WellPoint. When Minnesota's State Corporate Income Tax Rate is 9.8%, Indiana's State Corporate Income Tax Rate is 8.5%, the overall average State Corporate Income Tax Statutory Rate in the 44 US States that require Corporations to pay State Corporate Income Tax is 7.4%, there is no mathematical way that United Health Group should have paid a State Corporate Income Tax rate of only 2.46% and WellPoint of only 2.19% for the most recent 12 years.
Something has to be going on with a Shift of Income between Higher Corporate Income Tax Rate States to lower Corporate Income Tax Rate States, and perhaps even to no Income Tax Rate States. And this Income Shift between US States can't possibly be accounting for all of the substantial GAP in these State Tax Rates. There has to be other things going on in Multi-State Corporate Income Tax Strategic Planning that accounts for this huge unfavorable GAP.
I think the SEC should be taking a larger role here when you have Big Corps with such a huge GAP between State Corporate Income Tax Rates being paid and the Statutory State Corporate Income Tax Rates. There has to be some Investor Uncertainty, certainly by at least Sophisticated Investors, on this salient accounting issue. It's all about whether reported Corporate Earnings can be relied on. And it's also about financial transparency in footnote disclosure.
Speaking of financial transparency, I really can't understand how huge Corps like JNJ, Bristol Myers Squibb, Colgate-Palmolive, all of the huge US Defense Contractors...General Dynamics, Northrop Grumman, Raytheon, and Lockheed Martin....and also some other Big Corps think it is perfectly OK to not report the amount of their annual Current State Corporate Income Tax Paid or Payable. And again, where is the SEC here?
Much more to come.
