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.
These 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%.
Here are the earlier posts I have made so far related to large companies headquartered in States in the various parts of the US.
Part One Post…...US Southeast
Part Two Post.….US Midwest
Part Three Post…US US Heartland, other than Texas
Part Four Post….US Northeast, other than New York
Part Five Post…..US West, other than California
Part Six Post…….California
Let me now move in this Part Seven post to large companies with the majority of their US Profits in the State of Texas. Clearly, Oil and Gas Big Corps dominate the Texas Big Corp landscape.
As an introduction here, let me first show the Texas Corps 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
Exxon Mobil…………....73,257…….……84%
ConocoPhillips…….…...23,001……….…51%
Apache Corp...…………...8,093………….71%
Schlumberger…………....6,338…………..63%
Marathon Oil……………...4,427…………110%
Dell Inc..………………......3,350…………..84%
National Oilwell Varco..2,922…………..56%
Diamond Offshore……....1,179…………..59%
Fluor……………………......1,002…………..65%
Frankly, it makes no sense to me how Exxon Mobil can be generating only 16% of its Worldwide Pretax Income in the US in 2011, when its US Total Revenues Mix is double that at a 32% US Mix, and when its investments in long-lived assets in the US are more than double that at a 42% US Mix.
And it's not just Exxon Mobil, it's all of Big Oil.
California HQed Chevron, which has substantial operations in Texas, generated only 21% of its 2011 Worldwide Pretax Income in the US, much lower than the 40% of its Worldwide Revenues in the US, and 33% of its 2011 year end Worldwide assets in the US.
Texas HQed ConocoPhillips generated 49% of its 2011 Worldwide Pretax Income in the US, much lower than the 65% of its Worldwide Revenues in the US.
California HQed Occidental Petroleum, which has substantial operations in Texas, generated 44% of its 2011 Worldwide Pretax Income in the US, much lower than the 63% of its Worldwide Revenues in the US, and 79% of its 2011 year end Worldwide assets in the US.
And foreign owned BP, which has substantial operations in Texas, generated 27% of its 2011 Worldwide Pretax Replacement Cost Income in the US, much lower than the 35% of its Worldwide Revenues in the US, and 38% of its 2011 year end Worldwide noncurrent assets in the US.
This highly unusual situation tells you why the President’s Framework for Business Tax Reform is so important to prevent this clearly unfair situation to the 99% of the country from continuing to happen.
Two of the many key aspects in the President's Framework for Business Tax Reform that will help in the present misallocation of Worldwide Income between the US and Foreign are the elimination of the inappropriate LIFO inventory accounting and the measures to ensure that the present overdosing on unreasonable interest expense tax deductions in the US is eliminated.
And it also tells you why all of the US Republicans and some of the Democrats in the US Congress, who support such an incredibly low allocation by Big Oil Corps of their massive Worldwide Income to the US, have such a low approval rating, which is headed much lower. US citizens are just fed up with the Big Oil Corps receiving these massive tax breaks, year after year, even after they are already generating windfall pretax profits from soaring gas prices, which have had, and are currently having, such a python-like strangle hold on the US economy.
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 Texas companies 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.
Oil and Gas Corps (Yeah, there’s 18 of these…..Whew!)
Halliburton
Valero Energy
San Antonio, TX-based Oil & Gas Corp Valero Energy generated US Pretax Income of $3,190 mil in 2011 and $4,997 for the most recent three years combined.
So how much US Current Federal Income Tax did it pay or was payable related to this $4,997 mil of US Pretax Income earned in the most recent three years?
Well, believe it or not, only $178 mil, for an effective tax rate of only 3.6%.
Go figure! It’s just incredible the lucrative tax benefits these Oil and Gas Corps receive.
Well, how does Valero Energy come out under President Obama’s Framework for Business Tax Reform? Quite well.
If you assume the US federal income tax rate would have dropped from 35% to 28% for all of 2011, Valero Energy would have reduced its income tax expense, and thus also increased its After-tax Net Income, in 2011 by 7% X $3,190 mil, or by a huge $223 mil.
In addition, Valero Energy had a net Deferred Income Tax Liability of a massive $4,983 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, Valero Energy would reduce its Deferred Income Tax Liability by roughly $997 mil, and thus it would have recorded an additional income tax benefit, and thus additional After-tax Net Income, of $997 mil in 2011, due this trade off.
Therefore in total, the After-tax Net Income of Valero Energy would have increased by $1,220 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 $1,220 mil in one year for just one company, which is not exactly huge, Valero 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 in many other US States, who are huge supporters of Big Oil, are spending all of their time trying to reduce the US Deficit only 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.
EOG Resources
HollyFrontier
Baker Hughes
Southwestern Energy
Spectra Energy
Kinder Morgan Inc
Denbury Resources
Tesoro Corp
Concho Resources
Ultra Resources
Newfield Exploration
Pioneer Natural Resources
Cameron International
El Paso Corp
Patterson UTI
Anadarko Petroleum
Non Oil and Gas Corps
AT&T
LyondellBasell NV
Sysco Corp
Texas Instruments
Waste Management
Kimberly Clark
CenterPoint Energy
Dr Pepper Snapple
Torchmark
General Motors Financial
GameStop
ONCOR Electric Delivery
Whole Foods Market
Comerica
MetroPCS Communications
Southwest Airlines
Clear Channel Communiations
AMR
Energy Future Holdings
