Pentagon Notebook: Report shines a light on defense firms’ low tax rates

A new report has branded U.S. defense firms with a label that has become a political target, charging that they pay too little in taxes.

American defense manufacturers pay an average annual tax rate of 17.5 percent, placing them in a class with some of the nation’s least-taxed sectors like information technology, telecommunications, financial services and energy, Citizens for Tax Justice and the Institute on Taxation and Economic Policy concluded.

In the joint report, which features data spanning 2008-2010, the groups note the U.S. defense sector “is not exactly an industry, but it is a group that paid notably low tax rates.”

{mosads}Many defense firms paid less than the mandated 35 percent corporate tax rate, the report found.

“Not only was the 2008-10 effective tax rate on the top 10 defense contractors less than half of the 35 percent official corporate tax rate,” the report states, “but the effective rate fell steadily from 2008 to 2010, from an already paltry 19.3 percent in 2008 to a tiny 10.6 percent by 2010.”

The report comes at a time when Democrats are criticizing some firms for paying low taxes despite raking in big profits, as unemployment remains high and the economy continues to sputter.

Boeing, which also makes commercial aircraft, came in with the lowest tax rate among defense firms at -1.8 percent; SAIC had the highest at 28.7 percent, according to the report.

“While the federal corporate tax code ostensibly requires big corporations to pay a 35 percent corporate income tax rate, on average, the 280 corporations in our study paid only about half that amount,” the organizations write. “Many people will be appalled to learn that a quarter of the companies in our study paid effective federal tax rates on their U.S. profits of less than 10 percent.”

Lockheed Martin, the world’s leading military manufacturer, paid taxes at an average rate of 20.2 percent over the three years. Two other top firms, Northrop Grumman and General Dynamics, paid 23.8 percent and 27 percent, respectively.

Two other top defense firms paid a much lower rate: Raytheon at 13.7 percent and United Technologies paid 10 percent, according to the report.

“Tax matters are very complex, involving issues such as losses, research and development, government contracting, insurance, employment taxes and investments,” the Aerospace Industries Association (AIA) told The Hill in a statement.

In an email, Lexington Institute COO and industry consultant Loren Thompson called the report’s branding of companies as tax dodgers that merely “take advantage of legitimate provisions” in federal tax codes “misleading.”

“It’s like calling families tax dodgers for claiming a deduction on mortgage interest,” Thompson wrote. “When Boeing claims an R&D tax credit or writes off investment in a canceled weapons program, that’s quite reasonable.”

McHugh sees ‘alienation’ among military

There is a growing sense of “alienation” among military service members and their families after a decade of wars in which a minuscule number of Americans have fought, says Army Secretary John McHugh.

Only about “1 percent” of the U.S. population has served in uniform in the Afghanistan and Iraq wars, with the ranks of the all-volunteer military increasingly being filled by several generations of the same families, McHugh told reporters Wednesday.

This “sense of alienation” could have impacts on the military and American society that he said would be “not positive.”

While concerned, the Army secretary said he does not worry about the military “breaking away from its civilian overseers.”

McHugh is not the first Pentagon official to raise such concerns.

While many U.S. citizens have “fond sentiments for men and women in uniform, for most Americans the wars remain an abstraction,” then-Defense Secretary Robert Gates said in a Sept. 29 speech at Duke University. “A distant and unpleasant series of news items that does not affect them personally.”

The former defense secretary warned of “cultural, social, and financial costs in terms of the relationship between those in uniform and the wider society they have sworn to protect.”

Sequestration drama could delay 2013 budget

Lawmakers could wait to void automatic Pentagon cuts that a debt-panel failure would trigger until well after the 2012 election, meaning the final 2013 military spending bill would be passed months late, says a plugged-in defense think tank.

“Enforcement of sequestration — when funding is actually taken out of accounts — does not begin until January 2013,” the Center for Strategic and Budgetary Assessments said in a new report. “This gives Congress a full year to modify, delay, or nullify sequestration.”

Some prominent Republicans, like Senate Armed Services Committee Ranking Member John McCain (Ariz.), have floated the notion of voiding the $600 billion in additional Pentagon cuts that would be set off if the debt panel fails to fashion a plan for $1.2 trillion in federal cuts that both chambers can approve.

“Given that 2012 is a Presidential election year, it is conceivable that should sequestration be triggered Congressional action to alter sequestration may not happen until after the November 2012 election,” CSBA concludes. “A lame-duck session of Congress could delay enforcement of sequestration several months into 2013 to give the next Congress time to develop an alternative. As a result, the 2013 level of funding for defense may not be known until well into the fiscal year [which begins Oct. 1].”

Irregular moment 

The U.S. military’s failure to make permanent the lessons about irregular warfare during the Vietnam War are well-known. Military leaders have promised they won’t make the same mistake in the post-Iraq and Afghanistan era.

But an awkward — and rather odd — exchange during a Thursday House Armed Services Emerging Threats and Capabilities subcommittee hearing likely won’t inspire much confidence about such vows.

Subcommittee Chairman Mac Thornberry (R-Texas) asked witnesses from each of the military services whether their branches believe the U.S. military will engage in irregular warfare like that seen in Afghanistan and Iraq for years to come.

The witnesses nodded in unison — but not one uttered a single word.

The scene was a sharp contrast to the full-throated explanations service officials typically give on Capitol Hill when defending their core missions and pet hardware programs.