Graphics by Sana Imran
The BRB Bottomline: States have a tax problem. As big companies get bigger, state and city officials find it harder to negotiate with the cash-flushed behemoths that keep the city’s lights on. These companies are not only some of the richest, but also get the largest tax breaks. In fact, the most profitable companies in the Fortune 500 consistently pay about half the statutory federal and state income tax rate—a fourth pay less than 10 percent. How? They threaten to leave.
America’s Tax Problem
States have a tax problem. The most consistently profitable companies in the Fortune 500 only pay about half the statutory federal income tax rate—a fourth pay less than 10 percent. Some even get refunds from Uncle Sam—despite making over $160 billion in pre-tax profits, an astounding 30 companies have enjoyed a negative income tax rate in the past three years.
Nike, Locked and Loaded
Large companies receiving large tax breaks isn’t a new occurrence. During Nike’s 2013 fiscal year, the company negotiated a $2 billion tax break from the State of Oregon after threatening to leave. Despite Nike earning $39 billion in their 2019 fiscal year, the company paid less taxes than it did in 2013.
States have different approaches to taxing large corporations that do business across state lines. Oregon taxes Nike on what’s called a single sales factor method, meaning that Oregon only taxes the company on sales made in the state of Oregon and not those earned elsewhere. In 2012, Nike was considering a major expansion and wanted certainty from the state that the tax treatment would not change. Despite opposition from groups opposed to the tax break, such as the Oregon Center for Public Policy, the legislators had to give Nike what it wanted.
“Nike put an economic gun to the governor’s head and said you either guarantee the law won’t change or we’ll go elsewhere,” Chuck Sheketoff, executive director of the Oregon Center for Public Policy, told the Wall Street Journal. Nike forced the governors of Oregon to pass a law, the so-called “Nike Bill” (also commonly referred to as the 2012 Nike Tax Deal) to keep its taxes low which would help them greatly in a time of expansion. In December of that year, then-Governor John Kitzhaber called lawmakers into a special session with a single purpose: to lock in Nike’s tax request for decades, a 30-year guarantee for Nike that the single sales factor would remain in effect. This would provide Nike with tax deductions not only for the year of 2012 but for the following three decades.
Opponents of Nike’s controversial actions attempted to revoke the Nike Bill. Senator Brian Boquist, for one, led to take down the unusual deal lawmakers agreed to for the benefit of Nike and Nike only. He introduced Senate Bill 767 for that purpose. “Nike and others leading an effort to raise new revenue for schools and youth programs need to lead by example, meaning actually pay more of their fair share,” Boquist said in an email.
“Asking for small business[es] and [the] working poor to pay more than using a backdoor contract to avoid paying themselves is disingenuous. Maybe the high paid executives promoting wider taxation simply did not know they have a sweet deal out of the reach of the average working Oregonian. The bill simply allows Nike to help be part of the solution instead of part of the problem.” On February 8th of 2019, the bill was referred to the Senate Finance and Revenue Committee.
But companies strongarming state and local governments into reducing taxes does not only apply to the sneakers giant but also a wide range of companies in the Fortune 500.
Amazon, Fighting for their Rainforest
Amazon also has a record of threatening for preferential tax breaks. The e-commerce giant threatened to move jobs out of Seattle, Washington after a new tax was introduced to address its homelessness crisis. The world’s third-largest company has warned that the so-called “head tax,” which would have charged firms $275 per worker a year to fund homelessness outreach services and affordable housing, “forces us to question our growth here.”
Amazon, which is Seattle’s biggest private sector employer with more than 40,000 staff in the city, halted construction work in 2018 on a 17-story office tower in protest against the tax. Pressure from Amazon and other big employers, including Starbucks and Expedia, has forced councilors to reduce the tax from its initial proposal. The tax will only affect companies making revenue of more than $20m a year.
The tax was expected to raise between $45 and $49 million a year, of which about $12 million would come from Amazon. The company said it would restart building work on the tower and sublease another office block if city officials would reduce its tax bill.
“We are disappointed by today’s city Council decision to introduce a tax on jobs,” said Drew Herdener, an Amazon vice-president. We remain very apprehensive about the future created by the council’s hostile approach and rhetoric toward larger businesses.”
Twitter, Flying Away as a Bluebird Does
Back in 2011, Twitter threatened to leave San Francisco and was rewarded with a significant payroll tax break. At the time, San Francisco was crawling out of the Great Recession and suffering from large budget cuts. The city’s unemployment rate was at 9%, which only exacerbated vacancies, homelessness, and crime. The Board of Supervisors at the time hoped the tax break would keep Twitter in the city, which then would lead to Twitter bringing prosperity to the struggling district. The benefits, they said, would then trickle out to the rest. San Francisco thus made the decision to offer Twitter a major tax break to convince them to stay.
Sheketoff says this: “As it is Nike is paying 90 percent less than its fair-share in taxes.” This falls in line with other corporations trying to trim their bottom line, American taxpayers be damned.
Seattle eventually had to repeal its head tax after a strong backlash from Amazon. After all, it was just a matter of time. What could have been a meaningful measure to address homelessness by raising approximately $47 million a year from companies was thwarted.
Amazon reacted with extreme hostility to Seattle’s new taxation policy. They already do not pay a single penny to the government for federal income tax. Despite this, according to an analysis by the Institute for Taxation and Economic Policy (ITEP), Amazon received a $129 million tax rebate last year, equivalent to a -1% US federal tax rate. This was not the only year they had a negative tax rate.
Don’t forget about Twitter. Nine years ago, San Francisco gave Twitter a major tax break to stay in the city. But today, after taking the money, Twitter is putting San Francisco on mute as it plans to expand outside of the city. “Our concentration in San Francisco is not serving us any longer and we will strive to be a far more distributed workforce,” Twitter CEO Jack Dorsey said on an earnings call in 2018. “We have to build a company that’s not entirely dependent on San Francisco.”
McKesson, the Role Model
A 2018 article posted by The Sacramento Bee says this: “In today’s California, McKesson is mostly noteworthy among our richest companies for sins it has not committed. McKesson does not keep us glued to screens, and ignoring our loved ones. It does not spread hate through social media. It did not help the Russians steal the 2016 presidential election. It also hasn’t whined about the California business climate, threatened to leave the state, or forced San Francisco to give it massive tax breaks, as Twitter did.”
The three corporations mentioned above did not follow through with their threats to leave their home-grown states for they made sure their extreme tactics worked. However, McKesson, the largest drug distributor in the US, did not bother to threaten; instead, they just left. The company which ranked 6th in the 2018 Fortune 500 and was the Bay Area’s second-largest public company in terms of revenue moved to Texas due to high state income taxes. “We are excited to strengthen our presence in Texas and make Las Colinas our official global headquarters,” John H. Hammergren, McKesson’s chairman and CEO, said in a prepared statement. “Making this move will improve efficiency, collaboration and cost-competitiveness, while providing an exceptional work environment for our employees”. Simply put, McKesson moved out of California due to high taxes, and Texas rewarded them with $9.75m in grants when they announced their move.
Conclusion & Personal Take
This whole taxation issue is not an argument against certain business practices or even capitalism—any business owner should take all legal means possible to increase profits and grow—but it certainly is a condemnation of the complete lack of faith in our elected officials’ idea of what constitutes smart economic development. Rather than do what is right for state and city taxpayers—invest in infrastructure or education, per se—officials simply rig the tax code or write checks to corporations who threaten them. It is a rudderless approach to economic development: How can a single corporation spur growth that will sustain an entire city? It can’t. If a state puts that tax revenue or cash grant into city or statewide infrastructure, it will lure more investment than any tax break politicians can provide.
Further, just like how corporations had the guts to threaten governments, governors should also have the guts to say, “Sure, do as you wish.” Some companies that clearly do not have the desire to leave—often due to issues in finding new headquarters, financing relocation, and handling employment—threaten in hopes that they will also be able to receive tax breaks. Governments must evaluate the situation better when deciding to offer corporations massive tax cuts, for with such actions come repulsion in the aftermath. Further, just like McKesson, companies should simply leave if they really believe such a decision is in their best interest. For threatening governments, companies will eventually have to pay.
Many of the largest companies in the United States either receive significant tax deductions by strategically throwing their economic weight around to make tax laws that work in their favor. They do so by threatening governments, and this tactic proves to work surprisingly well. State and local governments need to find a way to address these tactics or face the reality that they could forever be puppets for large corporations.
Daniel Hyunwoo Lee is a sophomore at Cal intending to pursue a B.S. in Business Administration and a Minor in Education. Having lived in five different countries—Canada, England, South Korea, the United States, and Taiwan—Daniel has developed a passion for international business that he plans to explore in his writing at BRB. BRB aside, he likes making music beats, listening to podcasts, and most importantly, playing soccer. You can become Daniel’s best friend by inviting him to play soccer or buying him a cranberry scone at Caffè Strada.