Many companies pay no income taxes, study finds

NEW YORK (CNNMoney) -- The corporate tax rate is 35%. But an examination of 280 of the nation's largest corporations suggests that many aren't paying anything close to that.

The real tax rate paid by a slew of major corporations averages closer to 18.5%, according to a study released Thursday by two liberal tax research groups.

The report issued by Citizens for Tax Justice and the Institute on Taxation and Economic Policy paints the corporate tax code as wildly inefficient, filled with loopholes and subject to the influence of lobbyists who carve out special provisions for the companies they represent.

The study looked at 280 companies in the Fortune 500 that were profitable for all three years between 2008 and 2010.

The results: 111 companies paid effective tax rates of less than 17.5% over the three-year period; 98 paid a rate between 17.5% and 30%; and 71 paid more than 30%.

The average rate? 18.5%.

Some companies paid zero. And 30 actually owed less than nothing in income taxes over the three years.

How does that happen?

At the root of the problem is a system of inverted incentives that encourages corporations to lobby for special tax breaks -- and politicians to insert them into the tax code.

Corporations pay lobbyists. Lobbyists convince lawmakers to add tax breaks. Lawmakers modify the tax code.

It wasn't always like this. The corporate tax code was cleaned of special tax breaks during the Reagan administration.

The clean slate didn't last long, and over time, special provisions have been added back in. NASCAR racetrack owners are allowed to write off the costs of their racetracks. There's the sweet deal for companies that make Puerto Rican rum.

Some of the biggest breaks go to companies that are allowed to write off investments in equipment more quickly than they actually depreciate.

The American tax machine

And certain companies enjoy incentives geared specifically at their businesses. The oil and gas industry, for example, is allowed to write off some drilling and exploration expenses.

All the breaks add up -- sometimes eliminating a company's tax burden altogether. Other companies reported so many "excess tax breaks" that their tax burden went "negative," the study said.

According to the study, utility Pepco Holdings and conglomerate General Electric have the highest negative income tax rates.

Pepco's profits totaled $882 million over the three-year period, while the company had a negative tax rate of 57.6%. GE earned $10.5 billion, with a negative rate of 45.3%, according to the study.

Pepco (POM, Fortune 500) said Thursday that it always operates within the law, and that the IRS audits every income tax return filed by the company.

"Pepco Holdings pays all its required taxes, including but not limited to income, sales, use, property, and gross receipts taxes, in all the taxing jurisdictions within which it operates," the company said in a statement.

The truth about GE's tax bill

GE (GE, Fortune 500), which runs an extremely complicated multi-national operation, took issue with the study, calling it "inaccurate and distorted."

"GE paid billions of dollars in taxes in the United States over the last decade, and we expect our overall tax rate will be approximately 30% in 2011," the company said in a statement. "We believe the U.S. tax system needs to be reformed to close all loopholes, to lower the corporate rate and to provide a territorial system like every other major country in the world."

GE is not alone in calling for reform. Most lawmakers acknowledge the system is broken. President Obama called for corporate tax reform in his State of the Union address and the concept has support among lawmakers on both sides of the aisle.

The idea of reform is to lower the corporate tax rate while greatly scaling back tax breaks, loopholes and other provisions of the tax code that allow most corporate income to avoid taxation.

Despite the general consensus that something must be done, lawmakers are not likely to tackle the issue anytime soon. It's possible that the congressional super committee, now trying to find a way to cut the deficit, will make reform recommendations.

But don't count on too much action. The political atmosphere on Capitol Hill has prevented movement on many fiscal and tax issues in recent months.

Daniel Shaviro, a tax professor at New York University School of Law, said he doesn't anticipate big changes in the corporate tax code, at least in the near term.

"There is widespread sympathy for lowering the corporate rates," Shaviro said. "But I I tend to doubt it happens anytime soon."