WCPO analysis: What Cincinnati companies pay in taxes

Average tax rate for Cincy firms is 29.4 percent

CINCINNATI - One man’s duty is another’s dodge.

That much was evident in Washington last week when Caterpillar Inc. defended itself against accusations that it used a Swiss subsidiary to avoid up to $2.4 billion in U.S. taxes.

The world’s largest maker of mining and agricultural machinery testified before Sen. Carl Levin’s subcommittee on investigations , which looked into Caterpillar’s revenue-booking practices as part of a series of probes into offshore tax-avoidance abuses.

Caterpillar said its tax strategies were legal and accrued to the benefit of shareholders.

Critics called it tax dodging , plain and simple.

Who’s right? Even a room full of PhDs could fail to reach a consensus on that question.

But there is one easy way to measure how much U.S. companies pay in taxes compared to their peers. It appears in the cash flow statements of publicly traded companies and is commonly referred to as “cash for taxes paid.”

Procter & Gamble Co., for example, paid $3.8 billion in income taxes globally in its fiscal year that ended June 30, 2013. It also generated $14.8 billion in earnings before taxes, which translated to a tax rate of 25.5 percent.

Not all of that money went to the U.S. Treasury. Some went to state and local governments. Some went to foreign governments. In addition, there is an important accounting distinction between the tax rate calculated from cash flow statements and the effective tax rate that public companies disclose in their filings to shareholders. But the numbers do provide a glimpse at what companies are actually spending on taxes.

It’s a topic worthy of exploration as Americans race to meet the April 15 tax deadline and members of Congress explore tax reform ideas that could stimulate the economy, reduce the federal deficit and eliminate unfair loopholes.

To look deeper at how much companies pay, WCPO asked S&P Capital IQ to pull the “cash for taxes paid” numbers on every Cincinnati-based public company for a five-year period ending in 2012. Examining a five-year time frame evens out the numbers to adjust for one-year anomalies and provides a ready comparison to a similar analysis published last May by the New York Times .

The newspaper concluded that companies in the S&P 500 collectively paid an effective tax rate of 29.1 percent in the five-year period ending in 2012. The numbers vary widely by industry, with utilities, technology and telecommunications companies paying relatively low effective tax rates and insurance, energy and retail firms on the high end of the tax-rate spectrum.

Digging into the details

Here’s the bottom line for Cincinnati companies. Cincinnati Bell Inc., Air Transport Services Group Inc. and Convergys Corp. have the lowest cash tax rates among Cincinnati companies. Ashland Inc., Macy’s Inc. and Hill-Rom Holdings Inc. rank at among the highest.

As a group, Cincinnati companies paid $27.7 billion in taxes in the five years ending in 2012, compared to pretax earnings of $94.3 billion. The cash tax rate of all 33 companies combined is 29.4 percent.

Cincinnati Bell paid $10.4 million taxes from 2008 to 2012, or 2.2 percent of the $477 million in earnings generated by the phone company during that period, according to figures compiled by S&P Capital IQ.

Bell has been reducing its tax liabilities with operating-loss carryforwards left over from the early 2000s, when a failed investment in its Broadwing subsidiary led to $1.9 billion in tax losses. U.S. tax law allows companies to offset future income with past losses. Bell has until 2023 to use $1.1 billion in remaining losses. In the meantime, it’s using the cash it would have paid in taxes to invest in the business.

“There’s nothing fiendish” about it, said Christopher Elma, Cincinnati Bell vice president of treasury and tax. “Loss carryforward is a basic concept in the tax code and is available to virtually any taxpayer that has experienced losses. It leaves more money to invest in our business, more money to invest in our network, hire people and expand.”

Air Transport Service Group Inc. also carried forward operating losses from prior years to reduce its tax liability in the five years ending in 2012. The cargo aircraft leasing and maintenance firm had the second-lowest tax rate among Cincinnati-based companies, at 4.2 percent, according to S&P Capital IQ. ATSG has acquired about 20 new planes in the last ten years, providing lots of write offs for depreciation. It also has pumped more than $450 million into employee pension plans, further reducing federal tax liability.

“It’s not as if we’re cranking out huge sums of cash that we’re just sitting on,” said Chief Financial Officer Quint Turner. “We’re plowing it back into the business, which is creating jobs.”

AK Steel Holding Corp. delivered a similar response to questions about operating loss carryforwards. The company had a cash tax rate of 17.1 percent in 2013, according to S&P Capital IQ. Figures for the five-year period could not be calculated because the steelmaker had negative

earnings during that time frame.

“Many of our carryforwards are simply the result of our commitment to doing the right things for the right reasons,” said AK Steel spokesman Mike Wallner. “For example, from 2008 through the end of 2013, we contributed more than $1 billion in cash to our pension trust fund alone. Despite very challenging economic conditions for AK Steel and the entire steel industry at the time, we never wavered in our commitment to our retirees -- and that is something that we are all very proud of at AK Steel.”

Convergys Corp. has employed another technique to reduce U.S. tax liability by keeping profits from overseas subsidiaries in countries with lower tax rates than the standard U.S. corporate rate of 35 percent.

“As of December 31, 2013, approximately 40 percent of our cash and short term investments balance of $663.7 million was held in accounts outside of the United States, most of which would be subject to additional taxes if repatriated to the United States,” the company told shareholders in its 2013 annual report.

Repatriation is a hot-button topic in the ongoing debate over tax reform. Some argue the U.S. corporate tax rate should be lowered to encourage companies to bring back an estimated $2 trillion in overseas profits. Others argue companies are juggling their books to make it appear that income is being earned overseas.

Convergys said it operates a complex global business with 125,000 employees in 31 countries, including about 37,000 in the U.S. Convergys declined WCPO’s request for an interview, but provided a statement on its overseas profits.

“We employ standard cash management and investment practices that focus on our company’s ability to be profitable and invest in growth opportunities, our people and our business,” said Krista Boyle, vice president of global brand and communications for Convergys. “This is accomplished while carefully adhering to all tax and financial reporting requirements.”

Boyle said Convergys expects a full-year effective tax rate of 22 to 23 percent in 2014 and adds that figure has been consistent over the last few years. Its cash tax rate between 2008 and 2012 was 8 percent, according to S&P Capital IQ, third lowest among Cincinnati companies.

Convergys has advocated for tax reform “that fosters economic growth, job creation and investment,” Boyle said. “Congress should consider a tax system and corporate tax rate that will enable U.S. businesses to compete successfully in the global economy, attract foreign investment in the United States, increase capital for investment and drive U.S. job creation.”

That is a much different stance than the tax-reform ideas espoused by Citizens for Tax Justice. The Washington, D.C. –based advocacy group claims 111 of the country’s largest and most profitable corporations unfairly use the U.S. tax code to pay little or no federal income tax. CTJ advocates for reforms that “enhance fairness” and “close offshore tax shelters.”

“When a company decides where they’re going to locate, they look for things like an educated work force, good roads and transportation,” said Rebecca Wilkins, senior counsel for CTJ. “They’re looking for all these things that take taxes to pay for, and yet they feel no obligation to help contribute toward those things.”

For a detailed look at how much Cincinnati companies pay in taxes, use our searchable database :

To dig deeper on tax reform ideas now percolating in Congress try these sources:

Understanding the tax reform debate: Background form the U.S. Government Accounting Office .

Tax reform plan announced Feb. 26 by Dave Camp, chairman of the House Ways and Means Committee .

Business Rountable’s “Economic case for corporate tax reform”

Citizens for Tax Justice report on “The Sorry State of Corporate Taxes.”

For more stories by Dan Monk, go to www.wcpo.com/monk . Follow him on Twitter @DanMonk9.

 


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