Corporate Tax Deductions for Settlements, Fines and Damages

When you do something wrong and are punished for it by having money taken from you the purpose of that little exercise is to convince you not to break the law or violate the rules again. The size of the fine may vary depending on how serious the offense is, whether the person who is being fined is a first time offender, how much money the person who is being fined has, whether or not the person or institution levying the fine is in a bad mood that day or is looking to make an public example of some schmuck or a million other reasons. But the purpose of the fine remains the same regardless of whether you are an NFL player who doesn't like to talk to the media, an NBA player who publicly questions the integrity of the league or its referees, or a taxpayer who simply doesn't like paying his taxes when the city, state or country says that he must. For example, in my younger days (i.e four years ago) I used to consider posted speed limits on expressways as something more akin to suggestions than hard and fast rules. I certainly wasn't the only motorist inclined to do this. On some local expressways if you aren't doing at least 80 mph you just aren't trying. However, four years ago a friendly police officer stopped me to let me know that no, he for one really did take those speed limits seriously. He thought I should as well. To assist me in reaching this future goal he wrote out a ticket that had a fine which I found to be entirely too high. Well I suppose it had the desired effect. I got a radar detector and kept a closer lookout for cops. Most days I rarely drive more than 3-4 mph over the posted speed limit. I simply don't have the money to give away to a podunk municipality over nonsense like that.
But imagine if instead of having to pay the entire fine myself and wreak havoc in my monthly budget I could come to you and force you to pay a significant portion of that fine. You might protest that you weren't the big dummy who was driving significantly over the speed limit. I would respond with something along the lines of how we were all in this together. I would help you out if it came to it. So suck it up buttercup and hand over some cash. If you were forced to pay part of my penalty not only would you be upset (something I wouldn't care about that much to be honest) but more importantly the fine wouldn't be enough to deter my future behavior. Because the net fine to me would then be much lower I would be less likely to be deterred from speeding. That would be a really good deal for me. It might not be such a great deal for you or for the rest of society. The person who incurred the cost and broke the law/rules is not the one who is paying the cost.

When a Montana judge ordered Hyundai to pay $73 million in punitive damages last year to the families of two teenagers killed in a car crash, she found that the South Korean automaker had “recklessly” ignored scores of warnings over more than a decade about the steering defect blamed for the accident. But even if Hyundai is eventually forced to pay the full amount of the damages, the punishment could be substantially reduced through a tax loophole that permits the company to save millions of dollars by deducting any court-ordered punitive damages as an ordinary business expense. The result, critics say, is that taxpayers are in effect subsidizing corporate misconduct. 

Carmakers are far from the only companies that can exploit loopholes that allow them to lower their tax bill by deducting fines, forfeitures and other payments related to wrongdoing. Although the tax law forbids deductions for criminal fines and penalties owed to the government, other kinds of payments — to compensate victims or correct damages — are eligible for a tax deduction.  The rating agency Standard & Poor’s, which was accused of helping to cause the financial crisis with its inflated assessments of mortgage investments, is eligible to deduct half of the $1.37 billion settlement with state and federal prosecutors it agreed to this week, according to the U.S. Public Interest Research Group, a consumer-oriented nonprofit. The result would be a roughly $245 million reduction in its tax bill, the research group calculated.  

At least 80 percent of the more than $42 billion that BP has paid out because of the 2010 Deepwater Horizon rig explosion that killed 11 people and spewed oil into the Gulf of Mexico qualifies for a tax deduction, according to U.S. PIRG. That has saved an estimated $10 billion to $14 billion for the company. The exact amount is uncertain because of the lack of transparency, the group complained.  Brandon Garrett, a law professor at the University of Virginia and author of “Too Big to Jail,” said that BP was “asking taxpayers, in effect, to pay for the victim compensation fund it agreed to set up.”
LINK

So this is an incredibly good deal for companies which have to pay for wrongdoing. Not only do the company officers and owners generally avoid personal damages and/or prison time for misdeeds they even are able to avoid the full impact of the fine by getting the government (i.e. you) to help pay for it. Often they can get the fine or settlement reduced on appeal. It might not be such a great deal for you or for the rest of society. The person who incurred the cost and broke the law/rules is not the one who is paying the cost. That seems to violate basic fairness. This is another example of how our tax code and public perception of welfare leeches. This is why as we recently discussed one has to be careful when one reads about this or that inner-city ghetto or poor trailer park person "cheating" the system out of a few hundred dollars each month. Your disgust or contempt should be saved for the big dog who's crapping on the floor, not the little puppy. Corporations are cheating the government out of BILLIONS. Technically I shouldn't even use the term "cheating" as this is all quite legal. Moral outrage doesn't trump law. The fact that these tax code provisions are still in place proves the amount of power that corporations and their armies of lobbyists and attorneys can bring to bear. A great many of these mega corporations don't pay many, if any income taxes in the first place so this is just par for the course. Until enough people get angry enough to demand changes, these policies will continue. But to demand change you have to know what's going on behind closed doors and out in the open. This is why it's so important to read, inform yourself and get politically active.

More Taxes for Michigan Roads?

One of the reasons for encouraging people to use less gasoline and more green technology was not only to help reduce pollution but also to reduce wear and tear on the roads. Ultimately for pollution's sake it might be better for us all to be driving hybrids or electric vehicles. Or for the roads' sake more of us should be bicycling or taking mass transit. But in the mean time the auto companies should be compelled to increase CAFE standards while consumers should be encouraged to car pool, bicycle, walk to work, use mass transit and do other things which will result in less use of gasoline. One person who's almost comically gung-ho about this is NYT Pulitzer Prize winning columnist Thomas Friedman, who has a 70% chance of working his support for a carbon tax into any column he writes, no matter the subject matter. Mid-East Peace? Carbon tax will solve it. Islamic Terrorism? Carbon tax will hit the spot. Russia making ominous noises? A carbon tax will settle their hash. China polluting the entire planet? Obviously we need a carbon tax. Donald Sterling situation? A carbon tax would have prevented it. And so on. Vehicles are more fuel efficient than they used to be. Gasoline costs more than it used to. And people don't buy as many cars or drive as much as they used to. So you would think that the state would be happy about this right? We're cutting back on emissions and getting more out of less: the very definition of efficiency. That's good, right?

Well not so fast partner.


You see all that fuel efficiency and higher CAFE standards and bicycling to work may be good for the environment and for politicians who have made it their business to be seen as standing up against older methods of energy generation but they're not good for state revenue. When people buy less gasoline they also pay less gasoline tax. Less money coming into the state coffers means the state either has to (a) be wiser and smarter with less or (b) find a way to shake citizens down to make up the difference. If you know anything about Michigan politicians (or politicians anywhere) you can hazard an informed guess about which choice they would likely prefer. 

LANSING — Michigan could solve its road funding problems by being one of the first states in the nation to move to a system where motorists pay a fee based on the number of miles they drive, according to a University of Michigan report to be released today. The report, prepared for the Michigan Environmental Council by Sustainable Mobility & Accessibility Research & Transformation (SMART) at U-M, says fuel consumption is declining as traditional vehicles become more efficient and electric vehicles more common. 

Together, those trends are making road funding models based on fuel taxes obsolete, the report says. Instead of continuing to raise fuel taxes to pay for transportation infrastructure a mileage fee could more fairly allocate costs based on the number of miles driven, the time of day, the route taken, and the weight of the vehicle,” the report says. Elizabeth Treutel, a master of urban planning candidate at U-M and one of the authors of the report, said moving to such a system is probably five to 10 years away, but the report is partly intended to start a conversation.

LINK

Let me be perfectly clear, as our President likes to say. Climate change is real. I support less pollution, better roads, and within reason, certain higher CAFE standards. Lord knows I've spent more than my share of money because of issues caused by potholes. But as you might have noticed I also have this strange preoccupation with privacy. I just don't think it's any of the state's business how much I drive each year. I don't think there is any non-intrusive method for them to obtain that information. And if you're going to make people pay for the number of miles they drive then frankly I would just as soon the state (speaking federal and Michigan here) get out of the business of twisting arms to get companies to produce little hybrid/electric clown cars that at least in Michigan are not super popular. I have a 45 minute one way commute on a good day. I don't think it's "fair" to charge me more because I was not fortunate enough to find a job closer to home. And by "fair" I also mean in my interest. There are people who outearn me by factors of five, ten or more who may have a 10 minute commute. Is it really right that they would pay less tax than I do?

I also don't like the baked in presumption that that the state is guaranteed some fixed amount of revenue from citizens. They wanted us to use less gasoline; we're using less gasoline. Now that's no good because their tax revenue is declining? That is not my problem. If I were running things I would suggest cutting the truck weight limits in half and giving businesses more incentive to transport items by train. There are far too many semi-trailers or other large trucks on Michigan roads. That's where the road damage starts if you ask me. I also think the standards for roads are far too low. Other states in the upper Midwest don't seem to have the kinds of roads with which Michigan is cursed so I don't think the problem is weather related. So right now I'd want to know more about who's fixing the roads and why are they doing such a poor job before I'd support giving them more money.

But what's your call?

Is a tax based on mileage rather than gasoline usage fair?

If you were the state what would you do when faced with declining gas tax revenue?