Updated: 06 April 2011 11:00 PM

WASHINGTON — Like many utilities, Atmos Energy has earned a steady return for its shareholders over the past decade, including a profit of $334 million last year.

Yet Atmos, a natural gas distributor that serves homes in North Texas, got a tax refund from the federal government last year of about $85 million. That wasn’t out of the norm for the investor-owned utility, whose effective tax rate since 2001 is less than 4 percent.

Even as Washington signals that tax reform — including, perhaps, a lower corporate rate — is on the horizon, cases like Atmos’ show that many U.S. firms benefit from the current system. Some of them might not support reform if it means the end of favorable tax policies, including generous deductions and credits, that boost their bottom lines.

President Barack Obama and key Republicans in Congress agree that the current federal corporate tax rate of 35 percent — the second-highest in the world — is too high. But many U.S. firms pay far less than that.

Among the largest North Texas-based companies, Metro PCS’ effective tax rate over the past five years was 1 percent, according to figures prepared by Capital IQ. Dallas-based Southwest Airlines paid 15 percent. Irving-based Flowserve Corp. paid 19 percent.

“A lot of these firms, their support for tax reform is conditional,” said Martin A. Sullivan, an economist and contributing editor at Tax Analysts. “Anybody who has a lot of tax breaks now is not going to be in favor of a revenue-neutral reform that takes away those tax breaks and lowers the rates.”

Stimulus policies

Atmos largely owes its low federal tax bill to stimulus policies that Congress enacted over the past decade.

Beginning in 2001, businesses were allowed to accelerate their write-off of capital investments. The “bonus depreciation” policy allowed firms to deduct 50 percent of the cost of an investment in the first year of its useful life. That reduced taxable income, giving the firms more cash.

Economists and policymakers say profitable companies will put that cash to work, buying equipment, making acquisitions or otherwise boosting the economy.

Congress extended the bonus depreciation rules three times over the past decade, including through the 2009 stimulus package. Last year, Congress went even further, passing legislation that allows businesses to write off the full cost of capital equipment in the year it is purchased.

Like other tax breaks, bonus depreciation contributes to the growing U.S. budget deficit. The incentive is projected to reduce government revenue by $146.7 billion over the next five years, according to the Treasury Department.

That makes it the second most expensive corporate break, after a loophole that allows U.S. firms to avoid taxes on overseas earnings if they keep the cash offshore.

“The incentives for depreciation in our system are pretty good, pretty generous,” said Bill Blaylock, Texas Instruments’ vice president and senior tax counsel. “Those create cash flow for companies that are going to invest.”

A lower bill

Atmos represents a case study in how bonus depreciation lowers a company’s tax bill.

The investor-owned utility earned $334 million before taxes in 2010. Yet it managed to wipe out any tax liability, and even get a refund, mostly through huge depreciation deductions.

For financial accounting purposes — the numbers that investors typically care about — Atmos generated depreciation expense last year of $217 million. But bonus depreciation rules allowed the company to increase that deduction by about $725 million.

After accounting for the “bonus” deduction, Atmos effectively lost money — for tax purposes. That allowed the company to claim a refund of taxes paid during prior years, another incentive created by Congress, known as net operating loss carryback.

“It is largely driven by depreciation and the bonus depreciation provisions that have been enacted as a stimulus to the economy,” said Pace McDonald, Atmos’ director of taxation.

As a result of the new policy allowing 100 percent write-off in the year capital investments are made, Atmos is likely “to have very sizable deductions into 2011 related to the bonus depreciation provisions,” McDonald said.

Theoretically, Atmos will owe more tax in the future — after all of its depreciation is used up. But as long as Congress extends bonus depreciation, firms like Atmos will probably generate more tax savings from new investments than they will pay in taxes on older ones.

“You might actually be permanently paying less taxes,” said Eric Toder, co-director of the Tax Policy Center, a nonpartisan think tank that specializes in tax issues.

Critics’ take

Critics of corporate tax breaks and some economists say bonus depreciation rewards companies for making investments they would make anyway.

Atmos, for example, must invest hundreds of millions of dollars every year to maintain its network of pipelines and other natural-gas assets. Those costs are recovered from utility customers through the rates set by regulators.

“Most of these utilities are under that obligation to serve, so they have to make the investment to provide the service. In that sense, they are going to make the investment anyway,” said Robert Patrick, an economist and professor at Rutgers Business School. Patrick has published widely on regulated energy markets.

Bonus depreciation “is generally a way to increase their profits,” he said.

While business groups such as the U.S. Chamber of Commerce have lobbied for bonus depreciation and other tax breaks, Atmos doesn’t directly lobby in Washington.

But the tax incentive helped Atmos to continue investing in its network during the recession, when credit was tight and companies needed all the cash they could get, McDonald said.

“Congress and the president enacted these tax incentives for businesses to encourage investment in new plants and equipment,” McDonald said. “For Atmos Energy, these benefits aid the expansion and renewal of our natural gas infrastructure.”

While Atmos’ tax rate looks low in recent years, McDonald added, many other utilities have similarly benefited from the bonus depreciation rules.

Utilities are among the biggest beneficiaries of bonus depreciation, according to recent analysis by Sullivan for Tax Notes. a publication of Tax Analysts. A slower rate of depreciation would raise the industry’s tax liability by nearly 13 percent, according to his calculations.

Effect on deficit

Tax breaks like bonus depreciation contribute to the massive federal budget deficits that lawmakers are trying to reduce. In order to lower the corporate tax rate, some tax breaks may have to be reduced or eliminated, according to lawmakers.

Obama, in his State of the Union speech, said the corporate rate should be cut without adding to the deficit, a sign that he favors eliminating some of the tax breaks that companies relish.

Republicans are aiming for tax reform that includes a top corporate rate of 25 percent. A joint committee of senior House and Senate lawmakers on Wednesday discussed the first steps toward tax reform.

One of the witnesses, former Treasury Secretary James Baker, told lawmakers that tax breaks would have to be cut to pay for a reduction in rates.

“When you start eliminating these deductions and preferences, the lobbyists are going to come after you with both barrels,” said Baker, who was involved in the last major tax-reform legislation in 1986.

But some North Texas companies say they could support that tradeoff.

Texas Instruments, for example, has lobbied for a lower rate, but also benefits from valuable tax credits that subsidize research and manufacturing in the United States.

TI also supports exempting foreign earned income from U.S. taxation. TI pays a higher tax rate than many other international firms, largely because it repatriates much of its foreign earnings and pays U.S. taxes on it.

That isn’t the case for many international companies, which park profits overseas to avoid U.S. taxation.

TI officials said they might agree with a tax-reform plan that ends such incentives if the overall rate is reduced significantly.