NCPA - National Center for Policy Analysis

Corporate "Loopholes" Exaggerated

March 21, 2011

President Obama has been critical of so-called tax loopholes because, he maintains, they unfairly reward some industries -- such as the oil and gas industry -- and incentivize others to expand overseas rather than domestically.  While it is commonly thought that most corporate tax preferences are designed to help specific industries, the fact is over 65 percent of the benefits are available to all corporate taxpayers.  This is not to say that every widely available tax preference is justified or good tax policy; it just means they are not industry-specific, says Scott A. Hodge, president of the Tax Foundation.

An objective review of the budgetary cost of corporate tax expenditures reveals that the rhetoric surrounding corporate "loopholes" seems greatly exaggerated.  Contrary to popular opinion, only about 8 percent of corporate tax expenditure benefits are targeted to specific industries such as renewable energy, insurance, oil and gas, and coal, says Hodge.

  • The largest amount of budgetary resources -- nearly $18 billion -- benefits non-taxed industries such as credit unions, cooperatives, mutual insurance companies and Blue Cross/Blue Shield.
  • Renewable energy industries enjoy the second-most direct tax benefits at $12 billion over five years; however, these figures do not include the one-year extension of the ethanol credit.
  • The insurance industry enjoys the third-most benefits at $10.6 billion.
  • The oil and gas industries and the coal and mineral industries receive roughly equal tax benefits over five years at $5.8 billion and $5.9 billion, respectively.
  • Agriculture (excluding ethanol) and timber receive the least targeted benefits at $1.2 billion.

Indeed, the benefits received by state and local governments are nearly twice the amount targeted to specific industries.  The vast majority of tax expenditures are largely available to all corporations and industries.  With the mounting federal deficits, corporate tax expenditures have come under increased scrutiny as a potential source of new tax revenues.  However, considering the fact the United States has one of the highest corporate tax rates in the world, lawmakers would be far wiser to consider reducing or eliminating them within the broader context of corporate tax reform and lowering the federal corporate tax rate, says Hodge.

Source: Scott A. Hodge, "Who Benefits from Corporate 'Loopholes'?" Tax Foundation, March 1, 2011.

 

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