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When BP and the federal government reached a $4.5 billion deal to settle the oil giant’s wrongdoing in the 2010 “Deepwater Horizon” disaster (“BP fined, charged in Gulf oil spill — Official: Firm valued ‘profit over prudence’” (Nov. 16), Americans had more than one reason to take note.
Unlike earlier BP settlements related to the spill, the company was forced to take responsibility for its crimes that tragically cost 11 workers’ lives and led to an environmental catastrophe. And this time, American taxpayers won’t be asked to pick up much of the tab.
This new settlement, negotiated by the Justice Department, stipulates that none of the penalties paid are tax-deductible.
This is great news. In the past, federal agencies have touted big settlement numbers while corporate wrongdoers claimed to have paid their debt to society — but taxpayers quietly lost out as they ended up picking up much of the tab.
The Department of Justice deserves a lot of credit for negotiating hard on an issue that it may get little credit for.
As widely reported, BP had already written off almost $10 billion of Gulf spill costs as tax deductions. If BP had been able to treat the entire $4.5 billion settlement as a tax-deductible business cost, then the corporation could have reduced its future tax bills by more than $1.3 billion — a tax benefit that would ultimately be borne by the American taxpayer.
Even though BP’s actions in the Gulf clearly involved criminal wrongdoing, the company’s tax lawyers could have claimed that the settlement itself was “not punitive” — allowing BP to take at least part of the settlement amount as a tax deduction. Unless the Department of Justice clearly spells out that settlements like this cannot be deducted, companies that pay such fines and penalties typically deduct them as ordinary business expenses.
There are rules in place to prevent such abuse of our tax code, but they are poorly enforced. Companies often deduct settlement payments even when regulations suggest they should not, according to a study by the Government Accountability Office. Many government agencies that settle with corporations believe that tax issues surrounding a settlement should be left to the IRS. The IRS, however, has stated that it is up to government agencies to determine whether a settlement is deductible or non-deductible. This confusion has created a regulatory no-man’s-land where a corporation can saddle American taxpayers with part of the cost of its own wrongdoing.
When a company negotiates a tax-deductible settlement for its misdeeds, the public loses four times over.
First, the public suffers the direct impact of corporate wrongdoing — in the Deepwater Horizon case, a disastrous oil spill.
Second, taxpayers are forced to shoulder part of the penalty that the corporation alone should be paying: Every dollar meant to be punishment for destructive corporate behavior that a company ends up deducting is lost revenue and must be made up for through higher taxes on other taxpayers, cuts to public programs or an increase in the national debt.
Third, deterrence of future crimes is weakened: Reducing the cost of bad corporate behavior by making it tax-deductible does little to discourage offenses down the road, and allowing companies to write off the damage caused by their misdeeds as a “business expense” sends a misguided signal that corporate wrongdoing isn’t all that bad.
And fourth, settling a corporate offense behind closed doors rather than at an open trial prevents all of the evidence of a company’s misdeeds from being brought to light — including information on lax regulations that might have enabled the bad corporate behavior.
American taxpayers and the Justice Department must remain watchful: BP is expected to pay billions more in a coming settlement related to violations of the Clean Water Act and other environmental laws.
Whether or not the upcoming environmental settlement will also be free of hidden tax giveaways depends on whether federal negotiators again press hard to protect taxpayers.
You can also read this op-ed at NJ.com.
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