President Obama’s Framework for Business Tax Reform has as one of its main elements a reduction in the top Corporate Income Tax Rate from 35% to 28%, a huge chunk of which is paid for by a dramatic reduction in tax benefits from Accelerated Tax Depreciation.
To be fair to all businesses, it only makes sense that this huge tax rate reduction would also apply at the individual tax level for any business income of Sub S corps, partnerships, and Schedule C income passed through to any business owner.
I think this key aspect of the Framework for Business Tax Reform is what makes it so massively powerful for US job creation and US economic growth.
It is pretty clear that 50% and 100% first-year bonus tax depreciation have been great for US Big Corporation earnings, but have not in the aggregate added a dime of US job creation by these same US Big Corporations.
On the other hand, a substantial permanent business tax rate reduction, especially one targeted predominantly at the lower levels of business income, is a very powerful US job creator.
Also, I think that once bright people figure out the impact of this trade off of income tax rate reduction for accelerated tax depreciation, the stock market will move up dramatically, assuming the stock market makes the determination that this aspect of the Framework will pass in a reasonably short period of time.
Common stock prices are driven by earnings.
This Framework will result in a massive increase in earnings for companies with their operations predominantly in the US.
Whereas a permanent tax rate reduction directly increases corporate earnings, a killing of accelerated tax depreciation deductions does not reduce corporate earnings.
Also, companies with massive investments in property and equipment will obtain an additional upfront first-year huge pickup in earnings from bringing down the US Federal Income Tax Rate on the Cumulative Accelerated Tax Depreciation Deductions it has already taken the benefit of.
This additional earnings benefit results from the reduction of the US Deferred Income Tax Liability related to the difference in the Book and Tax Basis of Property and Equipment from one where the US Federal Rate is now set up at 35% to the new reduced rate of 28%.
Let me explain the impact of this trade off more specifically by taking you around the country to its effect on many businesses in many different industries.
The basic concept is that everything else being equal, the market price of the common stock of the company operating only in the US should increase by the continuing annual percentage increase in earnings, caused by this switch from Accelerated Tax Depreciation Benefits to a 7% income tax rate reduction.
For pure domestic companies, and just looking at this trade off, the continuing annual earnings increase should be mostly about 11%.
I started out in my earlier Part One post with large companies in the US Southeast. And in my Part Two earlier post, I added large companies in the US Midwest. And then in my Part Three earlier post, I added large companies in the US Heartland. And then in my Part Four earlier post, I added large companies in the US Northeast, other than in New York.
Let me now move in this Part Five post to large companies with the majority of their US Profits in the US Western States, other than in California. Clearly, as you move out to the Western States, you get a somewhat of a more entrepreneurial new business start up mentality.
As an introduction here, let me first show the US Western State Corps, other than California, with Worldwide Pretax Income above $1 bil in the most recent year 2011, and which also have a majority of their worldwide income earned overseas, along with what percentage of this income was earned in Foreign Countries.
……………..…….....................Worldwide
……………….……......................Pretax……….Foreign
………………….….....................Income………Income
……..…………..................(mils of dollars)…….Mix
Microsoft................WA......28,071……….....68%
Freeport McMoran..AZ.........8,818……….....76%
Southern Copper.....AZ.........3,449………...100%
Nike........................OR.........2,844……….....62%
Las Vegas Sands......NV........2,095………....103%
Newmont Mining.....CO.........1,810…………...51%
Paccar....................WA........1,507..............60%
Western Union........CO.........1,275..............67%
There is something seriously wrong with US Tax Policy, when the giant Microsoft generates 32% of its Worldwide Pretax Income in the US, while at the same time, Microsoft's US Revenues by customer location comprise a much higher 54% of its Worldwide Revenues, and also while Microsoft's US Long-lived Assets comprise a massive 86% of its Worldwide Long-lived assets.
It's all about Microsoft shifting income to foreign tax havens.
Let me quote its income tax footnote, explaining why its foreign tax breaks are so high....."The reduction from the federal statutory rate from foreign earnings taxed at lower rates results from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico, which are subject to lower income tax rates."
And all three of these countries are flat out foreign tax havens.
Well, just how huge of a foreign tax break did Microsoft receive?
Here's the total foreign tax breaks from having its foreign earnings taxed at lower tax rates than the Statutory US Federal Income Tax Rate:
FYE June 2011.....$4,379 mil
FYE June 2010.....$3,027 mil
FYE June 2009.....$1,843 mil
Not only are the amount of foreign tax breaks gigantic, but look at the incredible increasing trend, where in just the past two years, the total foreign tax breaks are up an incredible 138%.
With this significant and massive uptrend of foreign tax breaks, Microsoft's Total Income Tax Expense, on a book basis, dropped from 26.5% in FYE June 2009, to 25.0% in FYE June 2010, and down much further to only 17.5% in FYE June 2011. Whew!
With this massive income shifting to foreign tax havens, Microsoft's cumulative unremitted foreign earnings totaled $44.8 bil at the end of June 2011.
Clearly, Microsoft would love to repatriate these foreign earnings with a tax free holiday, like it did during the Bush Administration.
But if this were to happen, the 99% would be outraged.
President Obama’s Framework for Business Tax Reform has some incredibly powerful incentives to entice the above companies and many others to insource back to the US a huge chunk of these massive foreign earnings as well as the related jobs.
First, these foreign earnings shifted back to the US will be granted a 7% US federal income tax rate deduction.
Second, these foreign earnings shifted back to the US will be able to avoid a US federal minimum income tax on their foreign earnings. This provision is particularly focused in a fair manner at companies which overdose in shifting US income and the related US jobs overseas.
And third, there’s a special tax break for the costs of companies moving their operations back to the US.
Now, I’ll focus below on specific large US Western States companies, other than California, with US Pretax Income in the most recent year above $500 mil, and which also have the majority of their consolidated earnings generated in the US. I am also including some companies not making the US Pretax Earnings threshold but with a very large net Deferred Income Tax Liability position at the end of the most recent year.
ALASKA
Alaska Air Group
ARIZONA
Apollo Group
Phoenix, AZ-based For-Profit Educator Apollo Group generated US Pretax Income of $1,213 mil in FYE Aug 2011, which was much higher than its Worldwide Pretax Income of $954 mil.
Its Total Income Tax Expense, on a book basis, in FYE Aug 2011 was $421 mil, for an effective income tax rate of an unusually high 44.1%.
Thus, Apollo Group’s After-tax Net Income in FYE Aug 2011 was $533 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of FYE Aug 2011, Apollo Group would have reduced its income tax expense in FYE Aug 2011 by $85 mil, or by 7% X $1,213 mil. And thus, its FYE Aug 2011 After-tax Net Income would have increased by 16%, or by $85 mil divided by $533 mil. And its Equivalent Pretax Income in 2011 would have increased by substantially more.
In fairness to all of US society, some of these substantial additional continuing annual Equivalent Pretax Earnings increases of Apollo Group, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used by Apollo Group to fairly step up the low pay and low employee benefits of many of its educators. In addition, it would be fair for Apollo Group to reduce its tuition.
Republic Services
Pinnacle West Capital
US Airways
COLORADO
DISH Network
Very well run Englewood, CO-based, Pay TV Provider DISH Network generated Pretax Income of $2,411 mil in 2011, predominantly in the US . Its Total Income Tax Expense, on a book basis, was $895 mil, for an effective income tax rate of 37.1%. And thus its After-tax Net Income in 2011 was $1,516 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, DISH Network would have reduced its income tax expense in 2011 by roughly 7% X $2,411 mil, or by $169 mil. And thus, its 2011 After-tax Net Income would have increased by 11%, or by $169 mil divided by $1,516 mil.
In addition, DISH Network had a net Deferred Income Tax Liability of $950 mil at the end of 2011, caused by its heavy investment in Properties. Thus, ignoring state income taxes, its US federal Deferred Income Tax Liability would have to be reduced by $190 mil due to this trade off.
Therefore in total, the After-tax Net Income of DISH Network would have increased by $359 mil in 2011 by this key trade off included in the Obama Administration's wise Framework For Business Tax Reform. And its Equivalent Pretax Income in 2011 would have increased by substantially more.
In fairness to all of US society, some of these substantial additional continuing annual Equivalent Pretax Earnings increases of DISH Network, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used to reduce the exorbitantly high prices that DISH Network charges it customers. Also in all fairness, some of these additional earnings should be used by DISH Network to hire additional full-time employees and pay its current ones better.
Liberty Media
Liberty Interactive
Discovery Communications
Cimarex Energy
Denver, CO-based Oil & Gas Corp Cimarex Energy generated Pretax Income of $841 mil in 2011 and $914 mil in 2010. Its Total Income Tax Expense, on a book basis, was $312 mil in 2011 and $339 mil in 2010, for an effective income tax rate of 37.1% in both 2011 and 2010.
So those effective income tax rates sure seem reasonable. But there’s much more to the story here.
What was Cimarex Energy’s current US federal income tax paid or payable on this $1,755 mil it earned in the most recent two years? None…..in fact, it received a total net $2 mil US federal income tax refund related to this $1,755 mil of US Pretax Income generated in 2011 and 2011. Go figure! It’s just incredible the lucrative tax benefits these Oil and Gas Corps receive.
Anyway, Cimarex Energy’s After-tax Net Income was $530 mil in 2011 and $575 in 2010.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Cimarex Energy would have reduced its income tax expense in 2011 by 7% X $841 mil, or by $59 mil. And thus, its 2011 After-tax Net Income would have increased by 11%, or by $59 mil divided by $530 mil.
In addition, Cimarex Energy had a net Deferred Income Tax Liability of $972 mil at the end of 2011, caused predominantly by the huge tax subsidies related to its large investment in Properties, just like other Oil and Gas Corps have. Thus, ignoring state income taxes, Cimarex Energy would reduce its Deferred Income Tax Liability by $194 mil, and thus it would have recorded an additional income tax benefit, and thus additional After-tax Net Income, of $194 mil in 2011, due this trade off.
Therefore in total, the After-tax Net Income of Cimarex Energy would have increased by $253 mil in 2011, by this key trade off included in the Obama Admin For Business Tax Reform. And its Equivalent Pretax Income in 2011 would have increased by substantially more.
When you read all of the above, all US citizens should be outraged. Everyone in the US Congress who voted for these monstrous tax subsidies for the Oil and Gas industry should be removed from office. They are not working for the 99%, but only working for the 1% Big Oil and Gas Corps. And anyone in the US Congress, both Democrats and Republicans, who vote for a continuation of these massive tax subsidies, which you can see from the above trade offs, are even getting much more enhanced to the tune of $253 mil in one year for just one certainly not huge company, Cimarex Energy, clearly should be voted out of office.
I think this is why you see the members of the US Congress in Texas, Oklahoma, and even some in Colorado and in many other US States, who are huge supporters of Big Oil, are spending all of their time trying to reduce the US Deficit solely by cost cuts. They are successfully getting the country to move the conversation away from the massive tax subsidies granted to Big Oil.
The Big Oil Industry has a python-like strangle hold on the country’s economy that needs to be removed. The US economy can never be great again until this happens.
Davita
Molson Coors Brewing
Whiting Petroleum
QEP Resources
HAWAII
Hawaiian Electric Industries
IDAHO
IDACORP
NEVADA
NV Energy
Southwest Gas
NEW MEXICO
PNM Resources
OREGON
Precision Castparts
Exceptionally well run, Portland, OR Manufacturer Precision Castparts generated US Pretax Income of $1,335 mil in FYE Mar 2011, 89% of its Worldwide Pretax Income of $1,494 mil.
Its Total Income Tax Expense in FYE 2011 was $500 mil, for an effective income tax rate of 33.5%. This lower effective tax rate was helped by the US tax deduction for Domestic Qualified Production Activities, which will be increased under the President’s Framework for Business Tax Reform.
Precision Castparts’ After-tax Net Income in FYE 2011 was $994 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of FYE Mar 2011, Precision Castparts would have reduced its income tax expense in FYE 2011 by roughly $93 mil, or by 7% X $1,335 mil. And thus, its FYE 2011 After-tax Net Income would have increased by 9%, or by $93 mil divided by $994 mil. And its Equivalent Pretax Income in 2011 would have increased by substantially more.
The aptly-named Precision Castparts is precisely the kind of company the country should be rewarding, and the Obama Administration’s Framework For Business Tax Reform is precisely casting its part in making this happen.
PacifiCorp
Portland General Electric
UTAH
Questar Corp
Zions Bancorp
Skywest
WASHINGTON
Boeing
Well run, Aircraft Manufacturer Boeing Corp has its HQs in Chicago, but the main core of its operations are in Seattle.
Boeing generated US Pretax Income of $5,083 mil in 2011, 94% of its Worldwide Pretax Income of $5,393.
Its Total Income Tax Expense, on a book basis, in 2011 was $1,382 mil, for an effective income tax rate of a very modest 25.6%. And it’s not just 2011. For the most recent three years combined, Boeing generated Pretax Income of $11,631 mil, and recorded Total Income Tax Expense, on a book basis, of $2,974 mil, for an effective income tax rate for those three most recent years of precisely the same 25.6%.
What’s with these lower effective income tax rates?
Well, on the positive side, Boeing earned Research and Development Tax Credits of $146 mil in 2011, $158 mil in 2010, and another $175 mil in 2009. And the Obama Administration's Framework For Business Tax Reform wants to enhance these R&T Tax Credits.
But unfortunately to US citizens, by far the largest driver of Boeing’s lower effective tax rate in the most recent two years were the tax benefits from extremely favorable IRS tax audits settlements, which totaled $399 mil in 2011 and another $370 mil in 2010.
But it gets much worse.
What was Boeing’s current US federal income tax paid or payable on the $11,631 mil in earned in the most recent three years? None…..in fact, it received a total net $724 mil US federal income tax refunds related to this $11,631 mil of US Pretax Income generated in the most recent three years.
Go figure! And the 1%, including the Big Corps, and their many staunch supporters in the US Congress, wonder why the 99%, including small businesses, think the tax deck is stacked against them?
This is one of the many reasons the 99%, including small businesses, are so upset with the US Government. The IRS completely and continually caves in to the 1% Big Corps like Boeing in its tax audits, while simultaneously ruthlessly pursuing small businesses and individuals in never-ending, GDP growth reducing, patently unfair, unethical, and perhaps even illegal strategies in its numerous tax audits.
Anyway, Boeing’s After-tax Net Income in 2011 was $4,011 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Boeing would have reduced its income tax expense in 2011 roughly by a huge $356 mil, or by 7% X $5,604 mil. And thus, its 2011 After-tax Net Income would have increased by 9%, or by $356 mil divided by $4,011 mil. And its Equivalent Pretax Income in 2011 would have increased by substantially more.
In fairness to all of US society, some of these substantial additional continuing annual Equivalent Pretax Earnings increases of Boeing, a major US Defense Contractor, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be offset by the US Government reducing substantially the amounts it pays to US Defense Contractors like Boeing in its many huge dollar US Government contracts with them. This wise US Government cost-cutting initiative will help much to reduce the US Deficit.
Costco
Amazon.com
Starbucks
Extremely well run, Seattle, WA-based Retailer Starbucks generated US Pretax income for FYE Sep 2011 of $1,523 mil, 84% of its Worldwide Pretax Income of $1,811. Its Income Tax Expense in FYE 2011, on a book basis, was $563 mil, for an effective income tax rate of 31.1%. And thus its After-tax Net Income in FYE 2011 was $1,248 mil.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of FYE Sep 2011, Starbucks would have reduced its income tax expense in FYE 2011 by roughly $107 mil, or by 7% X $1,523. And thus, its FYE Sep 2011 After-tax Net Income would have increased by 9%, or by $107 mil divided by $1,248 mil. And its Equivalent Pretax Income in FYE Sep 2011 would have increased by substantially more.
Clearly, Starbucks is the kind of company that should be benefiting from the Obama Administration’s Framework For Business Tax Reform. And it clearly would by the way it was wisely and fairly designed.
In fairness to all of US society, some of these substantial additional continuing annual Equivalent Pretax Earnings increases of Starbucks, resulting from this wise trade off included in the President's Framework For Business Tax Reform, should be used to move more of Starbucks’ part-time workers to full-time status, to elevate the wages of its workers to a much more livable status, to hire additional full-time workers, and to also reduce the prices it charges its customers.
Puget Energy
Avista
Much more to come!
