U.S. PIRG Education Fund
2014 was the year that nine-figure government settlement deals with corporations passed from shocking anomaly to normal event, and many of these mega deals came with significant tax deductions for wrongdoing.
Many of the largest settlements this year, addressing allegations of some of the most egregious crimes, have allowed companies to deduct their payments from taxes.
For example, the record-breaking $16.65 billion settlement between the Department of Justice and Bank of America in reality will cost the corporation several billions less than the amount advertised in headlines and press releases. The value of this unadvertised giveback: at least $4 billion.
“When these payments get deducted from taxes, they become just another business expense rather than an explicit punishment,” said Michelle Surka, Program Associate with US Public Interest Research Group. “That’s the wrong message to send about an agreement that’s meant to deter future misdeeds against the public.”
Allowing corporations to claim tax deductions for the settlement payments they make became a notable trend this year, with some of the largest agreements coming with sizable deductions.
The Department of Justice collected a record $25 billion in penalties and fines this year. Many of these out-of-court deals to resolve charges of corporate misdeeds were with Wall Street banks atoning for bad behaviors that precipitated the financial meltdown. Others were pharmaceutical companies accused of false marketing or other medical firms accused of bilking Medicare.
Extendicare, Endo Health Solutions, and Shire Pharmaceuticals were some of the healthcare companies that settled and ultimately deducted payments made to resolve allegations of wrongdoing. Goldman Sachs, Bank of America, and HSBC are some of the Wall Street players to sign tax deductible settlement agreements in the past year.
Every dollar in tax windfalls that companies collect to subsidize their wrongdoing must be made up for by American taxpayers through higher tax rates, program cuts, or more national debt.
Settlement agreements don’t have to be tax deductible. This past year, several government agencies included specific clauses in their settlement agreements with corporations accused of wrongdoing that denied tax deductions for the payments.
The Environmental Protection Agency settled with both Hyundai and Kia over allegations of misleading consumers about fuel economy ratings. The two car companies paid a total of $100 million in penalties, making this settlement the largest of its kind. The EPA specified that any penalties associated with the settlement could not be deducted for tax purposes. By being completely explicit about this, the EPA saved American taxpayers at least $35 million.
“In 2015, government agencies shouldn’t just sign more settlement agreements—they should sign more effective ones. Agencies should protect taxpayers while preventing future corporate crimes,” said Surka, “Instead of just big numbers, we should aim for big results that protect the public.”
You can read U.S. PIRG’s report on tax write-offs in settlements here: “Subsidizing Bad Behavior: How Corporate Legal Settlements for Harming the Public Become Lucrative Tax Write-Offs.”