Opinion: Daily Journal

Duke Gets Bum Rap

I’ve had my disagreements with Duke Energy, both historically and recently. But the company got a bum rap in a new story stumbling its way through media circles: that Duke Energy uses abusive tax loopholes to avoid paying its fair share of federal income taxes.

A new report by two left-wing groups, Citizens for Tax Justice and the Institute on Taxation and Economic Policy, scorched Duke and 25 other Fortune 500 companies with substantial reported profits for failing to pay income taxes from 2008 to 2012.

My JLF colleagues and I have long favored the elimination of special exclusions and targeted tax credits that benefit politically connected corporations. But such inequitable tax policies are, for the most part, not the explanation for the lack of income-tax liability that Duke and the other companies have experienced in recent years.

Instead, these companies reduced their taxable income to zero by taking accelerated depreciation on capital investments they made in plants and equipment. During tough economic times, such as the dot-bomb recession of the late 20th century or the Great Recession of 2007-09, Congress has often resorted to giving companies accelerated depreciation to encourage more up-front investment, which speeds up the associated job creation.

This is not some kind of special favor secured by political largesse. When companies spend money to build new plants or buy new equipment, that money is properly considered an expense. It ought to be subtracted from gross income to yield net income, anyway. But government has not traditionally allowed companies to do that, to treat an immediate expense as an immediate expense. Instead, the government requires companies to pretend that they experience that initial cost over the lifetime of the asset — that is, they require companies to use a depreciation schedule to determine how much of the expense is deductible every year.

That gives the government the ability to grab taxes immediately rather than having to wait until future years when the profit actually occurs. You can dress this policy up however you like. But it is an abuse of governmental power, not a fair and efficient means of collecting revenue.

To accelerate depreciation allowances is to alleviate the abusive practice somewhat. It results in higher levels of investment, which is good for the economy. Indeed, any “tax reform” deal that restores longer depreciation schedules in exchange for lower tax rates is probably not worth making, because getting the tax base right — i.e., net income only — is at least as important as applying a low marginal tax rate to the base. What would be even better for the economy would be to ditch depreciation allowances altogether and allow companies to expense capital investments immediately, when they actually occur, and to carry these deductions forward into future tax years until they are expended.

Ah, some might ask, but what about the financing of capital investment? Companies don’t just use cash to invest. They often borrow money and pay it back later. Fine. Loans are not income. Companies should be able to deduct from taxable income the amount of capital investment or the debt service on loans they use to finance that capital investment, but not both.

There is yet another, more fundamental problem with the assertion that Duke Energy and other companies didn’t pay their fair share of income taxes: a company is not a person. Duke Energy is a bundle of contracts among investors, employees, vendors, and consumers. To tax the net income of Duke Energy is actually to tax the incomes of these individuals. Whether you think shareholders bear nearly all of the cost of corporate income taxes as lower returns, or workers bear nearly all of the cost as lower wages, or the proportions among the various groups are roughly the same, you must recognize that the stream of income we label “corporate profit” is subject to multiple layers of taxation.

In an ideal world, we wouldn’t use corporate taxes to tax individuals in the first place. We’d tax the investment gains of company shareholders, the wages of company workers and vendors, and the wages of consumers who then use their after-tax income to buy the company’s wares — and that would be it. No opaque, confusing, cost-inefficient extra layer of “corporate tax” would exist.

If you want to criticize Duke’s handling of the coal-ash spill or other issues, go right ahead. But criticizing Duke for calculating its taxable income correctly — by writing off as soon as legally permissible its real expenses — is either embarrassingly silly or thoroughly disingenuous.

-30-

Hood is president of the John Locke Foundation.