Big U.S. corporations are constantly on the prowl for ways to reduce their tax bite, and it seems that they are meeting with a good deal of success. Corporate tax rates make up only about 10% of federal tax revenues today, compared with approximately 33% in the 1950s. Last year, 20 of the largest, publicly held companies paid no income tax at all.
How do these companies manage this feat? There are many ways to reduce a corporation's tax burden – all perfectly legal, of course. Sometimes, however, the methods used to take advantage of these tax breaks can be less than transparent.
Recently, two particular federal programs have been spotlighted as favorites of big financial, tech, and communication companies: the low income housing tax credit, and the New Markets Tax Credit. Both programs encourage investment in low-income communities – and, very often, leave tangible improvements to such areas.
Other times, though, investment benefits the companies themselves, while leaving poor communities no better off – and costing taxpayers billions.
The low income housing tax credit
For banks and insurers that face federal requirements to invest in the areas in which they maintain a business presence, the LIHTC program is a win-win. Federal tax credits are awarded to states for specific types of housing projects; developers then may sell these credits to investing institutions. By purchasing credits for a discount, these entities could help create low income housing while paying $0.59 on the dollar, a pretty sweet return over a 10-year period.
Over the past 20 years, 40,000 subsidized developments have been created in this way, at a cost to taxpayers of $92 billion. The costs of LIHTCs have risen appreciably since the 1990s, reaching $0.67 in 2009 to the more current $0.93 per dollar of tax credit. Still, the ability to write off the entire amount for tax purposes has motivated big companies other than banks and insurers to jump on the tax credit bandwagon, such as Google, Verizon, and grocery store chain Kroger.
The utility of this type of public-private partnership is obvious, and the program was spared in a recent congressional loophole-purging initiative.
The New Markets Tax Credit
Less helpful to struggling communities is the New Markets Tax Credit, created in 2000 to help improve some of the poorer areas of the country by increasing private investment in areas left behind by the economic expansion of the 1990s. In return, big investors could expect to claim a 39% tax credit, spread out over seven years.
The idea was to fund projects that would revitalize these communities, and provide much-needed new jobs. A recent report from the Government Accountability Office found that the lack of clear parameters for NMTC projects has resulted in large investors tapping public funding for these projects, when the purpose is to leverage private investment only.
Incensed by the GAO findings, Oklahoma Senator Tom Coburn responded by issuing his own report, in which he highlights some of the ways in which NMTC projects have been used to help investors, rather than poor communities. He notes that, because the guidelines are so lax, almost any community can become eligible for these federal tax incentives, which are handed out by area Community Development Entities.
For instance, he outlines how big banks like Bank of America, Wells Fargo, and SunTrust have been the heaviest users of NMTC funds, going so far as to set up their own CDEs in order to receive federal funds directly. Since 2007, large financial institutions have claimed 40% of NMTC money.
This situation wouldn't be troublesome if the funds were being used appropriately, but that often is not the case. Senator Coburn mentions many projects that seem spurious, such as using funds to expand a dolphin exhibit at the Atlanta Aquarium, and the building of a sculpture at a health and wellness center near Palm Springs, California.
Senator Coburn notes that private investors claim over $1 billion in NMTC credits each year, and that the Joint Committee on Taxation predicts lost tax revenue to top $5 billion for the years 2013 to 2017. The problem whereby large investors are able to claim a tax credit on public, rather than private investment is very real: The GAO estimates that, between 2010 and 2012, 62% of NMTC projects involved a mix of federal, state, and local funds.
Both Senator Coburn and the GAO are calling for more transparency for the NMTC program. The GAO notes that the complexity of the financial structure of many of these projects not only masks the true costs of the program, but its efficacy, as well. Perhaps reformers would do well to look to the low income tax credit program for guidance.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.