WASHINGTON — Two new federal legislative proposals are seeking to address a long-festering but largely unpublicized discrepancy in how the U.S. government pursues accountability and recompense for corporate wrongdoing.
While the Justice Department regularly touts the size of settlements it arrives at with companies accused of malfeasance, often little information about the details of these agreements is divulged to the public. Further, U.S. law allows companies to write off much or all of these penalties through tax deductions.
Critics say the system significantly lessens the impact of what are meant to be punitive rebukes for wrongdoing. They also contend that the option of a tax write-off could work to cement corporate misconduct as a quasi-condoned cost of doing business.
“It’s a very interesting time on this issue, as up until recently the issue had only received intermittent attention,” Francisco Enriquez, a tax and budget associate with the US Public Interest Research Group, told MintPress.
“But I think the JPMorgan settlement was really the breaking point, as a very high proportion of that amount was tax deductible. That really spurred public debate about how federal agencies are negotiating these deals on behalf of the public, and made people quite angry.”
Indeed, punitive settlements between the Justice Department and corporations continue to grow in size. But a new record was set in November when JPMorgan Chase agreed to pay the federal government $13 billion to end a series of investigations into the bank’s handling of mortgages and mortgage-backed bonds leading up to the financial crisis of 2007-08.
When the agreement was announced, JPMorgan Chase noted that $2 billion of the settlement, the civil penalty portion, would not be tax-deductible. Much of the remainder, as compensation for investors and others, could be written off.
Even before the November settlement was announced, public discontent had begun growing in the aftermath of the BP oil catastrophe in the Gulf of Mexico in 2010. When the U.S. government’s settlement with BP was announced, in November 2012, its $4.5 billion was itself a record. The company agreed to pay another $20 billion into an account to compensate those impacted by the spill.
The Justice Department made history with that settlement not only for its size but also by forbidding the deduction of any part of the $4.5 billion penalty. Yet a huge proportion of other monies paid by BP for the clean-up were able to be written off.
“BP claimed $10 billion in tax savings by writing off $37.2 billion put aside for expenses related to the Gulf oil spill disaster,” U.S. PIRG stated in a report released last year. “To put this amount in perspective, BP’s $10 billion tax windfall was half the size of the $20 billion restitution fund that the company established. Taxpayers were effectively forced to shoulder the other half.”
Strengthening deterrence
Under current federal law, companies are not allowed to deduct penalties from their taxable incomes. However, they are allowed to do so for settlement-related monies not paid to the government – for instance, for compensation or remediation for those affected by any wrongdoing. Such payments are thus considered normal business expenses and can be written off.
According to a 2005 inquiry by the Government Accountability Office, 20 out of 34 companies that had reached settlements larger than $1 billion at the time reported deducting some or all of the amount. The GAO also noted the concern that “Although some civil settlement payments are deductible, their deterrence factor could be lessened if companies can deduct certain settlement payments from their income taxes.”
While criticism of the so-called settlement loophole has existed at low levels for years, it has increasingly found voice in the halls of Congress. The Obama administration first supported legislation to do away with the settlement loophole in 2010. The Senate even passed such a proposal, though the effort eventually went nowhere.
Now new momentum is coalescing around two Senate bills offered in recent months. The first is the Government Settlement Transparency & Reform Act, proposed in November by Sens. Jack Reed and Chuck Grassley. It seeks to close the settlement loophole by forcing the government and corporations to come to agreements prior to tax time about what portions of a settlement can and can’t be deducted.
“A penalty is supposed to deter others because it causes pain to a company’s bottom line,” Sen. Reed said. “If a company is paying thousands, millions or even billions in fines, it shouldn’t save money for those same misdeeds, it should be held accountable. The law needs to change to ensure the punishment fits the crime. Congress needs to close this settlement loophole.”
In December, several public interest groups, representing hundreds of state and national organizations, wrote to lawmakers to urge them to support the Reed-Grassley bill.
“The American people deserve this reform,” the groups wrote. “After being victimized by corporate malfeasance, they should not be forced to help pick up the tab for the corporation’s debt to society.”
Boosting transparency
The second bill, called the Truth in Settlements Act, was offered during the second week of January by two ideological opposites, Sens. Elizabeth Warren and Tom Coburn. This proposal would require significantly increased transparency around punitive corporate settlements. Regulatory agencies would be required to explain the tax implications of any settlement, while companies would likewise be required to offer public reporting about any subsequent deductions.
“Taxpayers deserve to know the settlement details corporations arrange with the government, and the best place for Congress to start is with policies that enhance transparency,” Sen. Coburn said on the bill’s introduction. “Since agencies are not currently required to disclose the financial structure of government settlements, too often the true value of those settlements is not known because often companies are allowed to deduct part of the payment.”
Sen. Warren likewise noted that strengthened transparency would “shut down backroom deal-making and ensure that Congress, citizens and watchdog groups can hold regulatory agencies accountable for strong and effective enforcement that benefits the public interest.”
In the past, regulatory agencies have stated that it is up to the Internal Revenue Service to determine whether settlements are tax deductible. Beyond this, however, federal agencies have far different track records on the level of transparency they offer regarding corporate settlements. The Environmental Protection Agency and the Securities and Exchange Commission, for instance, routinely publicize information about any such agreements they reach with companies.
The Justice Department, on the other hand, rarely makes such details available, despite the fact that this agency is typically involved in the most substantive such cases. Further, researchers told MintPress that their experiences in trying to gain access to documents related to past settlements, even though Freedom of Information Act requests, have been extremely difficult.
Indirect subsidies
Supporters say that the ideological gap between Coburn and Warren will provide cover for a significant number of other potential backers of the new bills.
“In some ways, this is the perfect issue for a very broad cross-ideological consensus – something where a liberal and someone aligned with the Tea Party can both say that agencies shouldn’t be doing these kinds of deals in the dark,” Phineas Baxandall, a senior analyst with the U.S. PIRG Education Fund and a co-author of its 2013 report on the issue, told MintPress.
“The Reed-Grassley bill mentions transparency in passing but doesn’t mandate what those transparency measures have to be, whereas the Warren-Coburn bill doesn’t mandate anything about what should or shouldn’t be tax deductible. The two proposals are clearly building on one another.”
Baxandall says that change has been so slow on the issue because both sides in a settlement, the government and the corporations, have reasons to slow-walk any reforms to the status quo. But he warns that it’s the public that loses out.
“The public is quite distant from this. The issue is generally poorly understood, and so it’s the public that takes the hit,” he says.
“The end result is diluted incentives against public harms and indirect subsidies. After all, every dollar that gets written off has to be made up somewhere, and the budget situation in recent years has crystallized those trade-offs.”