Tax season is upon us and while individuals celebrate refunds or scowl at amounts owed to local, state, and federal governments, General Motors will receive a healthy refund in the amount of $104 million from the United States. In fact, GM hasn’t paid any federal income taxes in over a decade.
How can an automaker that makes billions of profits each year not pay a cent to the federal government? Charles Ballard, an economics professor at Michigan State University, sat down with The Detroit Free Press to hash out the facts. While some have jumped on big corporations for not paying their fair share, there is a logical reason why GM is owed money after making billions of dollars.
Ballard explained personal income taxes and corporate income taxes are very different. While individuals file based on what happened in the past year, corporations can calculate events that happened years ago that affect the final outcome. In this case, it’s GM’s spiraling downfall at the end of last decade that led to its bankruptcy and restructuring. Other factors include a shift in tax policy to benefit larger corporations. For example, the corporate income tax rate was 53 percent in the 1940s through the 1960s. Beginning in the 1970s, that began to shift largely through the 1980s and today. The most recent tax law overhaul further cut the corporate rate from 35 percent to 21 percent. Income generated outside the U.S. is also no longer taxed.
The biggest reason why GM is owed money from the federal government rather than paying taxes back is due to one thing: net operating loss carryforwards. As mentioned, and as we all recall, GM was in bad shape last decade. The automaker lost $86 billion between 2005 and 2009. Since 2009, its pretax profits have been around $69 billion, thus, GM hasn’t earned as much as it had lost in the past.
GM can, therefore, carry forward those losses into the future and cause the federal government to owe the automaker money. Eventually, the profits will catch up with the previous losses, however, and GM will have to pay federal taxes. Former GM Chief Financial Officer, Chuck Stevens, said he didn’t know when that would happen but estimated GM won’t pay any federal taxes for the next several years.
The tax code also rewards companies like GM for investing in research and development, infrastructure, and employee pensions. About $7.5 billion goes to R&D per year at GM. The government looks at the investments as credits for companies investing and potentially creating new jobs to stimulate the economy.
Yet, none of this applies to local and state taxes. GM is responsible for paying those taxes, but the big bills owed to the feds won’t arrive for years to come.