The Moral Is
1:33 pm
Tue February 26, 2013

Commentary: Don't Deduct the Fine After Doing the Crime

Ida Jones
Credit Fresno State

From the financial crisis of 2008 to the oil spill in the Gulf of Mexico – recent events have put corporate crimes in the spotlight. But what happens when corporations try to use the tax code to skirt their criminal responsibilities? On this edition of FM89's commentary series "The Moral Is," Fresno State business professor Ida Jones says it’s time for companies to pay up.

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“Don’t do the crime if you can’t do the time.” In other words, if you’re not prepared to pay the consequences, don’t engage in risky behavior. And if you do engage in the risky behavior and get caught, then “take your medicine.” Those principles of responsibility and fairness should apply to corporations. However because corporations can take tax write-offs of some criminal settlements as “ordinary costs of doing business,” corporations don’t bear the full responsibility for their crimes.

Let’s look at a recent example. Remember the 2010 Deepwater Horizon oil spill into the Gulf of Mexico? Eleven people died and BP caused billions of dollars in harm and damages to people, businesses, animals and the environment. In January 2013, a federal judge approved a $4 billion settlement of criminal charges. According to a recent Wall Street Journal article, BP pleaded guilty to, among other things, 11 counts of felony manslaughter and 1 count of lying about the size of the spill. If BP deducts that settlement as a cost of doing business, then it will not have borne full responsibility for its crimes. It’s up to the Justice Department to ensure that BP can’t and doesn’t deduct the settlement from its taxes. It’s up to other agencies, including the EPA, to do the same to ensure that BP pays the full costs of its crimes.

So why does it matter whether the settlement is tax deductible? There are several reasons. First, the tax code already prohibits businesses from deducting criminal penalties as ordinary costs of doing business. That’s to make sure individuals and businesses bear the full costs of their crimes.  But corporations sometimes get around that by claiming that some or all of the settlements in criminal cases are to compensate, not to punish. Let’s close that loophole. Second, if a corporation deducts criminal settlements as costs of doing business, then, in essence, the costs of the criminal conduct are passed on to taxpayers who must pay higher taxes to make up for the lost revenue. And last, but not least, allowing this tax deduction reduces criminal law’s deterrence effect. Since one of the key purposes of criminal prosecutions is to deter criminal conduct, allowing tax deductions for costs of that conduct means the corporations don’t really pay. And full payment is especially important since the corporations themselves can’t suffer the other criminal penalty—jail time.

What can we do to make sure companies bear the full consequences of their crimes? The key solution is to change the tax code to prevent companies from deducting any portion of criminal settlements as a cost of doing business. Since 2003, Senators McCain and others have introduced legislation to limit (or eliminate) companies’ ability to deduct these settlements from their taxes. These attempts have failed. That is unacceptable. A second solution is for agencies to publish the real amounts of fines after taxes—more accountability for government and the companies. If this doesn’t change, businesses are not “doing the time” or taking responsibility for their actions. Taxpayers are footing the bill.  That needs to change.

The views expressed on The Moral Is are those of the author and do not necessarily represent the views of Valley Public Radio.

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