February 12, 2021
February 12, 2021
Talk about a one-two punch. A new report from the Washington Post reveals that the U.S. public is set to pay for the opioid crisis again. Already, communities across the country have paid a heavy price via the devastating public health toll. Now, it appears taxpayers will be on the hook for billions in corporate tax breaks as four pharmaceutical companies exploit a loophole in the Trump-GOP tax law and a CARES Act tax provision meant for companies facing pandemic-related profit losses.
Johnson & Johnson, Cardinal Health, McKesson, and Amerisource Bergen are forecasting more than $4.6 billion in corporate income tax breaks from deducting their share of a $26 billion opioid crisis settlement with state and local governments, the Post found, based on a review of the companies’ financial disclosures.
McKesson, which has agreed in principle to pay $8.1 billion, says its after-tax hit will be just $6.7 billion, meaning the company believes it will get a $1.4 billion tax cut from the settlement. Amerisource Bergen and Johnson & Johnson each estimate a $1.1 billion tax cut, and Cardinal Health now estimates a tax break of $974 million.
Cardinal Health is particularly egregious. The company is using a controversial provision in last year’s CARES Act to turbocharge its tax cut. Its quarterly financial report, released last week, discloses that the company will take an immediate billion-dollar tax break from its opioid settlement, enabled by the generous net operating loss (NOL) carryback rules temporarily created by the CARES Act.
As ITEP has explained, the CARES Act allows companies to use losses in 2020 (which may or may not be pandemic-related) to reduce taxable income all the way back to 2015. Since the corporate tax rate was 35 percent until 2017, far above the current 21 percent, this carryback ability boosts the tax cut companies can receive from net operating losses by up to 40 percent.
Cardinal Health says it plans to apply the loss generated by its opioid settlement to offset not just income reported in 2020, but also income in 2015, 2016 and 2017. The company says it “intend[s] to file for a federal income tax refund of $974 million as a result of the net operating loss carryback under the CARES Act, which we expect to receive within 12 months.”
The deductibility of corporate settlements has been a sore point with American taxpayers since it was revealed that BP’s $20 billion payment for its role in the Deepwater Horizon ecological disaster would be largely deductible. The 2017 Tax Cuts and Jobs Act (TCJA) included a provision designed to make it more difficult for companies to write off settlements of this kind. But the TCJA, never the most water-tight legal document, includes a loophole: if settlements can be characterized as “restitution” they may be tax-deductible.
While the language of the $26 billion settlement is not yet available, other companies facing opioid-related charges have been careful to use the “restitution” language in their agreements to preserve tax deductibility. The choice of all four of these companies to project tax breaks from the opioid settlement suggests they are savvy enough to take advantage of the TCJA loophole as well.
Net operating losses are a blunt instrument for getting cash in the hands of companies affected by the pandemic: the benefits from this provision go to companies in the retail and service space that saw their revenues collapse last year but also go to companies already facing long-term difficulties even before last year. As Cardinal Health’s latest disclosure shows, the CARES Act’s NOL provisions also give otherwise healthy companies a chance to take the sting out of settlements paid to remedy the grievous harm their actions have caused millions of Americans.