Let’s Stop the Tax Break That Normalizes Corporate Criminality

When a business gets caught creating an epidemic of killer drugs, destroying our coastal fisheries, or renting out rat-infested apartments, that lawbreaker faces financial consequences. There are government fines, restitution payments to families when children die, remediation expenses to clean up our polluted land and waters, and compliance upgrade costs such as installing rat traps or pollution control devices.

These are the financial consequences that, in a just society, we use to punish and deter lawbreaking businesses in hopes that they will deter future criminal behavior. Break the law; get caught; pay the price, and then get rewarded with a tax break.

Wait—what’s that last part? Does the law actually give tax breaks for corporate lawbreaking?

Break the Law and Get a Tax Break

A decade ago, oil and gas titan BP PLC pleaded guilty to 14 separate criminal counts related to the worst environmental catastrophe in US history after its offshore oil rig, Deepwater Horizon, exploded, killing 11 people. It leaked more than 200 million gallons of crude oil into the Gulf of Mexico, producing an oil slick roughly the size of Iowa and devastating fisheries, wetlands, and livelihoods.

BP’s 2015 plan to claim a tax deduction for its then-estimated $32 billion exposure—in fines, restitution, and remediation cost—drew a furious public outcry because the deductions would shift $10 billion of BP’s punishment onto taxpayers.

The Congressional Research Service analyzed tax deductions in light of BP’s criminal behavior and confirmed the legitimacy of the tax break for lawbreakers such as BP. The report identified the financial consequences of BP’s wrongdoing—costs of remediating damage to the Gulf, as well as restoring shorelines and barrier islands—as “standard business expense deductions.” It reads more like a BP advocacy piece than a neutral analysis.

Oil burns during a controlled fire May 6, 2010, in the Gulf of Mexico, following the sinking of the Deepwater Horizon oil platform off the coast of Louisiana.

Photo by Justin E. Stumberg/US Navy via Getty Images

Tax Cuts and Jobs Act

From the Nixon administration until the 2017 Tax Cuts and Jobs Act, Internal Revenue Code Section 162(f) broadly denied corporate deductions for “any fine or similar penalty” to a government for violating any law.

Haggling across the years over the scope of this rule, corporate lawbreakers argued that “similar penalty” adds nothing to “fine,” while Treasury generally understood the phrase to include (as nondeductible) the mandated financial costs of remediation, restitution, and the like.

The Supreme Court’s public policy doctrine requires a deduction’s denial when its allowance would “reduce the sting” of penalties that cost the lawbreaker money. It’s widely understood that Congress’ enactment of Section 162(f) was a codification of that doctrine. Consequently, federal courts have ruled that involuntary payments for restoration and rehabilitation were also nondeductible under the statute.

Reading the first paragraph of the TCJA’s revisions to Section 162(f), you might think Congress had summoned courage to stand up to the lawbreakers’ lobby. It’s a strong rule of non-deductibility for pretty much all amounts paid in connection with lawbreaking or potential lawbreaking when the government is involved.

But the next paragraph is a gigantic “never mind” of the type loved by corporate lobbyists and abhorred by public interest watchdogs. It explicitly allows tax deductions for the big-ticket financial obligations of corporate wrongdoers: restitution and remediation. It would seem that no unmerited tax give-away goes accepted as is.

Shortly after TCJA was enacted, my former law school tax professor, Alan Feld, predicted that corporate scofflaws would “move as much to restitution as possible” to stretch deductibility even further. Corporations’ comments on subsequently proposed Treasury regulations demonstrated this obsession with stretching even further this unmerited gift to wrongdoers.

Frustrating good public policy, the TCJA essentially told corporate lawbreakers, “We’ve got your back even when you break the law in ways that gravely damage society; we’ll give you a big juicy tax deduction to reduce your penalty’s sting.”

We’re Talking Big Dollars

BP isn’t alone in the multibillion-dollar lawbreakers club. Good Jobs First, whose corporate violation tracker allows anyone to look up large companies’ charged offenses and financial consequences—reports that Wells Fargo & Co. has incurred more than $20 billion in penalties since 2009. And big business has paid more than $54 billion just for product liability offenses since 2008. (In such settlements, the company rarely admits wrongdoing.)

Is it a coincidence that congressional approval of this rule was adopted while BP was still in the middle of working out the details of its largest-in-history lawbreaker’s tax deduction—$30 billion and rising? Dunno. What we do know is that the tax deduction for corporate crime has an enormous price tag for the public.

States Must Stop Rewarding Corporate Lawbreakers

Tax breaks for lawbreakers is a policy failure at the state level. State corporate income tax laws generally make the federal tax law (with identified exceptions) their starting point. Hawaii has “decoupled” from the Section 162(f)(2) federal tax break for lawbreakers. But few, if any, others have followed its lead, so this massive financial reward for bad behavior is widespread.

Demonstrating sound tax policy leadership this year, a handful of legislators in Maryland made a good run at decoupling, too. But legislators ended the session this week without advancing their bill. Testifying before the Maryland Senate’s Budget and Taxation Committee last month on behalf of the Center on Budget and Policy Priorities (where I’m a part-time consultant), I urged broad support.

The tax break for corporate lawbreakers is poor public policy. Here’s why:

• Subsidizing scofflaws diminishes the deterrence effect.
• Deductibility of punishment normalizes criminal behavior.
• Shifting punishment’s financial sting to the taxpaying public revictimizes society.
• Rewarding corporate criminals with tax breaks undermines public confidence in government institutions.

It’s time we eliminated the federal and state tax deduction for corporate criminals.

This is a regular column from public interest tax policy analyst Don Griswold, who’s also a senior fellow at the Digital Economist. Look for Griswold’s column on Bloomberg Tax, and follow him on LinkedIn.