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The 'tax dodgers' of the defense industry

The biggest companies in the defense game paid an average of less than half the U.S. corporate tax rate over the past three years, according to a muckraking new report by populist D.C. tax watchdogs.

In fact, in their study, the Citizens for Tax Justice and the Institute on Taxation and Economic Policy wrote that a few brand-name defense giants paid no taxes at all. Their statistics detail the incredible closeness of the federal government and its big vendors, which benefit not only from big-ticket defense programs but a galaxy of special provisions in the tax code.

In 2010, for example, General Electric, Honeywell, Navistar and Boeing paid no tax or even made money from federal protections or subsidies, according to the report. Boeing's "effective tax rate," as calculated by the report authors, was -1.8 percent from 2008 to 2010. Honeywell's was -0.7 percent.

Most of the big defense contractors did pay some taxes, although at rates below the standard corporate 35 percent, the report said. From 2008 to 2010, the top 10 companies' rate averaged about 15.3 percent; the defense industry overall paid at about a 17 percent rate.

A few well-known names: In that three-year period, Lockheed Martin paid a 20.2 percent rate; Northrop Gruman paid 23.8 percent; General Dynamics paid 27 percent; United Technologies paid 10 percent; and SAIC paid the most -- 28.7 percent.

So how do they do it? Special protections, subsidies and other benefits. One example is "accelerated depreciation," which the report describes this way: "The tax laws generally allow companies to write off their capital investments considerably faster than the assets actually wear out. This 'accelerated depreciation' is technically a tax deferral, but so long as a company continues to invest, the tax deferral tends to be indefinite."

Another example is stock options: "Most big corporations give their executives (and sometimes other employees) options to buy the company’s stock at a favorable price in the future. When those options are exercised, companies can take a tax deduction for the difference between what the employees pay for the stock and what it’s worth (while employees report this difference as taxable wages)."

The report goes into great detail in a company-by-company breakdown, and here are just a few examples:

Boeing: The research and experimentation tax credit saved the company $158 million, $175 million and $172 million in 2010,2009 and 2008. Excess tax benefits from stock options reduced federal and state taxes by $19 million, $5 million and $100 millionin the same years.

Lockheed Martin: Because the company does not disclose U.S.and foreign pretax income, the study estimated foreign pretaxincome based on reported current foreign income taxes. Morethan 80% of the company’s worldwide sales in 2010, 2009, and2009 were to the U.S. government. The Domestic Production Activities Deduction saved the company $110 million, $39 million,and $67 million in 2010 and 2009. The research and experimentation tax credit saved the company $43 million, $43 million and $36 million in the same years. Excess tax benefits from stock options reduced federal and state taxes by $21 million and $92 million in 2009 and 2008. Accelerated depreciation saved the company substantial amounts in all three years.

General Dynamics: Deferred taxes explain most of the tax breaks the company received in 2010, 2009 and 2008. In addition, the Domestic Production Activities Deduction reduced taxes by $61 million, $28 million and $36 million in 2010, 2009 and 2008. Excess tax benefits from stock options reduced federal and statetaxes by $18 million, $5 million and $31 million in 2010, 2009 and 2008.

Northrop Grumman: Reported pretax profits in 2008 were adjusted upward for a non-cash good will impairment charge. The Domestic Production Activities Deduction reduced taxes by $34 million, $24 million and $19 million in 2010, 2009 and 2008. The research and experimentation tax credit saved the company $15, $17 and $13 million in the same years. Excess tax benefits from stock options reduced federal and state taxes by $22 million, $2 million and $48 million in the same years.

And so forth and so on. These benefits are in addition to other ways the government helps or protects defense companies. Remember how we learned from Wikileaks that the federal government has lobbied hard on behalf of Boeing and Lockheed, trying to drum up foreign aerospace and defense sales?

All right -- it is what it is, industry advocates would argue. Here's what John Bennett wrote in The Hill:

In an email, Lexington Institute COO and industry consultant Loren Thompson called the report's branding of companies as tax dodgers that merely "take advantage of legitimate provisions" in federal tax codes "misleading." "It's like calling families tax dodgers for claiming a deduction on mortgage interest," Thompson wrote. "When Boeing claims an R&D tax credit or writes off investment in a canceled weapons program, that's quite reasonable."
The business of America is business, after all, and as we keep being reminded, the defense industry is made up of for-profit companies. The companies would certainly argue that navigating the tax game as skillfully as possible is just another way to fortify the bottom line. Show Full Article

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