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tax avoidance
How Big Oil Lobbied Its Way Out of Accountability for the LA Fires
"Accountability is an existential threat to their business model, and their business model is an existential threat to all of us, and that’s the bottom line," said Meghan Sahli-Wells, the former mayor of Culver City.
Jan 15, 2025
As devastating wildfires continue to burn in the Los Angeles region on Wednesday—placing tens of thousands of Californians under evacuation orders and causing over $250 billion in economic damages by one estimate—a pair of new reports highlight how fossil fuel companies have dodged responsibility for their role in the destruction and hampered the state's ability to fight back by depriving it of funds.
California's fossil fuel industry deployed lobbying muscle to kill legislation that would compel polluters to pay into a fund that would help prevent disasters and aid cleanup efforts, and has taken advantage of a tax loophole to deprives the state of corporate tax revenue, thereby "putting climate and social programs in peril." In the case of the former, California's biggest fossil fuel trade group, the Western States Petroleum Association, recently launched a digital campaign that appears aimed at throwing cold water on any such legislative efforts.
According to The Guardian, the Polluters Pay Climate Cost Recovery Act of 2024 appeared on 76% of the 74 lobby filings submitted in 2024 by the oil company Chevron and the Western States Petroleum Association.
The legislation—which didn't make it out of the state senate in 2024—would, if enacted, create a recovery program forcing fossil fuel polluters to pay their "fair share of the damage caused by the sale of their products" during the period of 2000 to 2020, according to the nonprofit newsroom CalMatters.
According to The Guardian, the filings from those two firms that included this specific bill totaled over $30 million—though lobbying laws do not require a breakdown that would make clear how much was spent specifically on the "polluter pay" law.
With Los Angeles burning, there's renewed interest in passing the bill, The Guardian reports, citing supporters of the legislation. But Western States Petroleum Association isn't sitting idly by. On January 8, the group launched ads that suggest measures like the "polluter pay" bill would force them to increase oil prices. The ads, which appear to have been taken down, do "not specifically mention the polluter pay bill, it echoes the 2024 campaign that did," wrote The Guardian.
"Accountability is an existential threat to their business model, and their business model is an existential threat to all of us, and that’s the bottom line," said Meghan Sahli-Wells, the former mayor of Culver City who currently works for the environmental advocacy group Elected Officials To Protect America, told the paper.
Meanwhile, another report from The Climate Center—a think tank and "do-tank" focused on curbing pollution—has thrust a tax loophole long used by multinational oil and gas companies, into the spotlight.
The report released last week details how "years of litigation and lobbying by oil and gas majors like ExxonMobil, Chevron, and Shell Oil" are responsible for a large corporate tax avoidance policy that is known as the "Water's Edge election" that became law in 1986.
The law allows multinational corporations to "elect" avoid taxes on earnings they designate as beyond the "water's edge" of the borders of states in which they operate, according to The Climate Center.
"Closing the loophole as it applies to the oil and gas industry could put anywhere between $75 to $146 million per year back into the state’s budget," the report states.
For context, California closed a $46 billion budget shortfall last year, including by enacting cuts to climate and clean air programs.
"The water's edge tax loophole allows multinational fossil fuel corporations to dodge paying their fair share of taxes that can help fund vital environmental projects, which could include wildfire preparedness," California Assemblymember Damon Connolly (D-12) told the progressive outlet The Lever, the first outlet to report on the findings.
California lawmakers last year passed a bill that took aim at some aspects of the loophole, but an advocacy group whose board of directors includes representative from the oil and gas industry has filed lawsuit challenging the constitutionality of the reform, according to the The Climate Center.
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Pass Wyden’s Billionaire Income Tax Bill to Close Unfair Loopholes
The bill would end two of the ultra rich’s favorite tax-avoidance strategies: “Buy-Borrow-Die” and “Buy-Hold for Decades-Sell.”
Jan 06, 2025
America’s ultra-rich today love to play tax-avoidance games. One of their favorites goes by the tag “buy-borrow-die,” a neat set of tricks that lets billionaire households avoid any taxes on the gains they make from their investments.
The simple rules of the buy-borrow-die game: buy an asset—with your millions or billions—and watch it grow. If you have a hankering to pocket some of that gain, don’t sell the asset. Any sale would trigger a capital gains tax. Just borrow against that asset instead, a simple move that lets you avoid capital gains levies so long as you live.
And what happens when you die? Nothing! Your asset’s untaxed gains vanish for income tax purposes under a tax code provision known as “stepped-up basis.”
Thanks to this buy-hold for decades-sell, the effective tax rate on the multi-billion dollar gains of America’s Bezoses, Gateses, and Buffetts, even when they do sell assets before they die, approaches zero.
This buy-borrow-die, progressive lawmakers like U.S. Sen. Ron Wyden from Oregon believe, amounts to a game plan for creating dynastic fortunes. Wyden has proposed an antidote, dubbed the “Billionaires Income Tax,” which would require billionaires to pay tax annually on the gains they make from tradable assets like the corporate shares that list on stock exchanges.
Gains from non-tradable assets would go untaxed, under Wyden’s proposal, but only until the assets get sold, at which point the tax rate would be increased to account for the tax-free compounding of annual gains. And those who inherit millions and billions from billionaires would no longer, under Wyden’s bill, be able to benefit from our current tax code’s magical stepped-up basis.
Closing the buy-borrow-die loophole would, all by itself, be reason enough for passing Wyden’s Billionaires Income Tax bill. But buy-borrow-die may only be the second leakiest loophole Wyden’s proposal would close. His Billionaires Income Tax proposal would also shut down a far less well-known loophole I like to call “Buy-Hold for Decades-Sell.”
How does this loophole work? Consider two rich taxpayers, Jack and Jill. Each invests $10 million in a stock they hope will grow at a 10% annual long-term rate, a good but not great return for a rich investor. Investors in Berkshire Hathaway, for example, have seen average annual returns of about 20%.
Our Jack goes on to hold his stock for 30 years and realizes exactly the 10% annual return he hoped to achieve.
Jill opts for a more aggressive investment strategy. After holding her stock for just over one-year, long enough to qualify her profits for the preferential tax rate available to long-term capital gains, Jill then sells at an 11% gain, pays tax on the gain, and invests the remaining proceeds in a stock she believes has more potential going forward. She successfully repeats this strategy each year for 30 years.
You might guess that Jill’s eventual nest egg at the end of 30 years, after paying federal income tax at the current long-term gains rate of 23.8%, would be larger than Jack’s. But, despite Jill’s superior investment acumen, Jack’s $135 million nest egg turns out to be 20% larger than Jill’s $112 million nest egg.
How could that be? Jack, to be sure, does pay the same 23.8% tax on his capital gain as Jill. But Jack’s money has had the benefit of 30 years of compounding before Jack has to pay that tax. That benefit far outweighs Jack’s lower annual investment return.
Jack’s whopping tax benefit from holding an appreciating asset for several decades should give us pause. After all, we want investors to seek the highest yielding investments, not the ones that get the best tax treatment. We don’t want developers of promising new technologies, for example, struggling to raise capital because our tax law confers higher returns on investors who just keep on holding old, under-performing investments.
In our example, Jill’s annual tax of 23.8% on her gains reduces Jill’s 11% pre-tax rate of return to an after-tax return of 8.38%. But Jack, because he gets to defer the tax on his 10% annual gains for 30 years, sees the after-tax return on his investment reduced by only 0.93 percentage points, to 9.07%.
As a result, Jack, a poorer investor than Jill, has millions more wealth on hand at the end of 30 years.
What tax rate would Jack have to pay annually on the growth in his stock value to place him in the same position at the end of 30 years as a one-time tax of 23.8% upon the sale of that stock? He’d only have to pay tax at a 9.3% annual rate. That 9.3% would actually run lower than the 10% income tax rate that our federal tax code currently expects Americans with incomes barely above the poverty level to pay.
In some extreme cases today, our super rich can enjoy an effective annual tax rate on their investments far lower than Jack’s.
Consider a lucky Berkshire Hathaway investor who bought 100 shares back in 1979 at $260 per share, a $26,000 investment. That investor’s shares would be worth about $70 million today. The annual pre-tax return on those shares would be 19.19%. If the investor sold the shares and paid tax at 23.8% on the long-term gain, the investor would be left with about $53.35 million.
The investor’s annual rate of return after-tax would be 18.47%, a trifling 0.72 percentage point reduction from this investor’s pre-tax rate of return. The effective annual rate of tax on the growth in the investor’s stock value would be 3.75%, less than one-sixth the 23.8% one-time rate on the investor’s compounded gains.
That about sums up perfectly the magic of buy-hold for decades-sell, the loophole that causes the effective annual tax rate on the growth in the value of investments to decline as the rate of return and length of holding period increase. Thanks to this buy-hold for decades-sell, the effective tax rate on the multi-billion dollar gains of America’s Bezoses, Gateses, and Buffetts, even when they do sell assets before they die, approaches zero.
We don’t need to just close the buy-borrow-die loophole. We desperately need to shut the buy-hold for decades-sell loophole just as firmly.
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Corporate Tax Avoidance Rampant During First 5 Years of Trump-GOP Law: Study
"Corporate tax avoidance occurs because Congress allows it to occur, and the Trump tax law made it worse," says a new study by the Institute on Taxation and Economic Policy.
Feb 29, 2024
Many large, profitable U.S. companies paid little to nothing in federal taxes during the first five years of the 2017 Trump-GOP tax law, an unpopular measure that slashed the corporate tax rate from 35% to 21% and introduced new loopholes that the rich and powerful rushed to exploit.
A study released Thursday by the Institute on Taxation and Economic Policy (ITEP) examines 342 companies that were profitable during each of the first five years of the tax law's enactment. The new research shows that corporate tax avoidance has been rampant under the law, with 23 of the companies included in the study paying nothing in federal taxes between 2018 and 2022 and 109 businesses paying nothing in at least one of the five years.
Kinder Morgan, NRG Energy, and T-Mobile were among the profitable companies that paid a 0% or negative effective tax rate during the study period.
"When President [Donald] Trump and congressional Republicans slashed the statutory corporate income tax rate from 35% to 21%, they could have maintained or even increased the effective rate paid by corporations by shutting down special breaks and loopholes in the corporate income tax," reads the new report. "But from the very beginning of the debate over the 2017 legislation, it was clear their goal was to allow corporations to contribute less to the public investments and the society that makes their profits possible."
Nearly a quarter of the companies analyzed by ITEP "paid effective tax rates in the single digits or less" during the law's first five years, including prominent corporations such as Netflix, Nike, and Citigroup.
ITEP found that the "industries enjoying the lowest five-year effective tax rates were utilities (negative 0.1%); oil, gas, and pipelines (2.0%); motor vehicles (3.2%); and telecommunications (7.7%)."
On average, the 342 companies included in the analysis paid an effective tax rate of 14.1% between 2018 and 2022—significantly less than the 21% statutory rate established by the Tax Cuts and Jobs Act.
The difference between what companies would have paid in taxes if they were held to the 21% statutory rate and what they actually paid amounts to a major taxpayer subsidy, ITEP said. The 342 companies received a combined $275 billion in subsidies during the first five years of the Trump-GOP tax law, with the majority going to just 25 companies.
Bank of America received the largest tax break of all the companies analyzed—$23.89 billion.
"For many of the biggest corporations in America, our 21% tax rate is an accounting fiction," said Matt Gardner, a senior fellow at ITEP and the lead author of the new study. "Because of an array of special-interest tax breaks, the most profitable corporations in America routinely pay effective tax rates far below the legal rate."
"It does not have to be this way. Congress should take more steps to crack down on this widespread corporate tax avoidance."
While corporate tax avoidance certainly didn't begin with the 2017 tax law, ITEP's study notes that it "did little to change" the status quo—"except to allow companies to pay less than ever."
"Corporate tax avoidance occurs because Congress allows it to occur, and the Trump tax law made it worse," the analysis says.
Some notorious tax avoiders, such as Amazon, were excluded from the study because they reported a loss during at least one of the five years that ITEP examined. Amazon paid an effective tax rate of 8.9% between 2018 and 2022.
"Americans who heard President Trump and his supporters in Congress tout the 21% corporate income tax rate they enacted in 2017 may be alarmed to hear that so many corporations pay much less than that in reality," said Steve Wamhoff, ITEP's federal policy director and report co-author. "But it does not have to be this way. Congress should take more steps to crack down on this widespread corporate tax avoidance."
The report specifically advocates a global minimum tax that would require multinational companies to pay an effective rate of at least 15%, a proposed change aimed at cracking down on profit-shifting. The Biden administration negotiated a global minimum tax deal with other nations in 2021, but the divided U.S. Congress has yet to advance the proposal.
"Drafters of the Trump tax law made some token efforts to address these problems, for example, by imposing a weak U.S. tax on certain profits that American corporations claim to earn offshore," ITEP's report observes. "This left the corporate income tax in dire need of the Biden administration's efforts to reform it."
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