Editor’s Note: Even as the federal government executes major
cutbacks, it’s giving huge subsidies in the form of tax breaks to
industry, a fact legislators rarely acknowledge. The Boston Globe
recently published a thorough and eye-popping report detailing the
nature and extent of these breaks. We think it’s a must-read.
By Pete Marovich
First published in the
Boston Globe
WASHINGTON — Lobbying for special tax treatment produced a
spectacular return for Whirlpool Corp., courtesy of Congress and those
who pay the bills, the American taxpayers.
By investing just $1.8 million over two years in payments for
Washington lobbyists, Whirlpool secured the renewal of lucrative energy
tax credits for making high-efficiency appliances that it estimates will
be worth a combined $120 million for 2012 and 2013. Such breaks have
helped the company keep its total tax expenses below zero in recent
years.
The return on that lobbying investment: about 6,700 percent.
These are the sort of returns that have attracted growing swarms of
corporate tax lobbyists to the Capitol over the last decade — the sorts
of payoffs typically reserved for gamblers and gold miners. Even as
Congress says it is digging for every penny of savings, lobbyists are
anything but sequestered; they are ratcheting up their efforts to
protect and even increase their clients’ tax breaks.
‘It’s not about tax policy, it’s about benefiting the political class
and the well-connected and the well-heeled in this country,’ Said
Senator Tom Coburn of Oklahoma.
The Senate approved tax benefits for Whirlpool and a host of other
corporations early on New Year’s Day, a couple of hours after the ball
dropped over Times Square and champagne corks began popping. A
smorgasbord of 43 business and energy tax breaks, collectively worth $67
billion this year, was packed into the emergency tax legislation that
avoided the so-called “fiscal cliff.’’
In the days that followed, the tax handouts for business were barely
mentioned as President Obama and members of Congress hailed the broader
effects of the dramatic legislation, which prevented income tax
increases on the middle class and raised top marginal tax rates for the
wealthy.
Yet the generous breaks awarded to narrow sectors of the American
business community are just as symptomatic of Washington dysfunction as
the serial budget crises that have gripped the capital since 2011.
Leaders of both parties have repeatedly declared their intention to make
the corporate income tax code fairer by lowering rates and ending
special breaks, while intense lobbying, ideological divides, and
unending political fights on Capitol Hill block most progress.
The result: sweeping bipartisan tax reform of the sort negotiated in
1986 by Republican President Ronald Reagan and Democratic House Speaker
Thomas P. “Tip’’ O’Neill Jr. is rated a long shot once again this year.
In fact, the most visible signs of cross-party cooperation on corporate
taxes are among regional groups of lawmakers who team up, out of
parochial interest, to maintain special treatment for businesses in
their home states.
In the absence of meaningful change, corporations like Whirlpool
continue to pursue the exponential returns available from tax
lobbying. The number of companies disclosing lobbying activity on tax
issues rose 56 percent to 1,868 in 2012, up from 1,200 in 1998,
according to data collected by the nonpartisan Center for Responsive
Politics.
Whirlpool had plenty of company on New Year’s, including
multinational corporations with offshore investment earnings, Hollywood
companies that shoot films in the United States, railroads that invest
in track maintenance, sellers of energy produced by windmills and solar
panels, and producers of electric motorcycles.
Their special treatment is a fraction of a broader constellation of
what the federal Joint Committee on Taxation estimates will be $154
billion in special corporate tax breaks in 2013, contained in 135
individual provisions of the tax code.
Watchdogs and tax analysts denounce these favors as a hidden form of
spending that amounts to corporate welfare. In essence, these “tax
expenditures’’ are no different than mailing subsidy checks directly to
companies to pad their bottom lines.
Congress reduced the number of tax breaks in 1986 as part of the
broader reform package. The breaks steadily crept back, particularly in
the last decade, as lawmakers heeded requests from advocacy groups and
business lobbyists to lower taxes as a way of subsidizing particular
industries.
“There’s a justification and rationale for virtually every one of
these. They have their intellectual advocates, and they have their
political advocates, and that’s how they get in the law,’’ said Lawrence
F. O’Brien III, an influential lobbyist and a top campaign fund-raiser
for Senate Democrats who represents financial industry clients and other
interests.
Whirlpool has a powerful Michigan delegation behind it, including key
committee chairmen of tax-writing and energy committees in the House.
In response to questions from the Globe, the company said its special
tax breaks led it to save “hundreds’’ of American jobs from the effects
of the recession.
“Energy tax credits required that Whirlpool Corporation make
significant investments in tooling and manufacturing to build highly
energy-efficient products,’’ Jeff Noel, Whirlpool’s corporate vice
president of communication, said in an e-mail. “If you look at our
101-year history, we have definitely paid our fair share of US federal
income taxes.’’
But its federal income taxes have been minimal in recent years,
thanks in large part to tax credits and deferrals, according to public
filings. Its total income taxes — including foreign, federal, and state —
were negative-$436 million in 2011, negative-$64 million in 2010, and
negative-$61 million in 2009. It carries forward federal credits as
“deferred tax assets’’ that it can use to lower future tax bills.
The renewed tax breaks granted by Congress in January, which were
retroactive to the beginning of 2012, will not be recorded until
Whirlpool pays its 2013 taxes. Because of the absence of that tax
credit, and because of greater earnings and changes in foreign taxes,
the company estimated its total 2012 tax expenses will be $133 million.
Whirlpool did not provide a specific number of jobs retained. The
benefits were not sufficient to protect Whirlpool’s employees at a
refrigerator manufacturing plant in Arkansas. Last summer, the company
laid off more than 800 hourly workers, closed the factory, and moved
manufacturing of those refrigerators to Mexico. It was part of an
overall reduction of 5,000 in its workforce announced in 2011 in North
America and Europe.
Congress “made a big mistake,’’ by authorizing hundreds of millions
of dollars in tax credits for Whirlpool based on arguments that the
company would retain domestic jobs, said Howard Carruth, a machine
maintenance worker and union official who began work at the plant in
1969 and lost his job last year when the plant closed.
“They really hurt the economy around here,’’ he said. “I blame the corporate greed.’’
The closing also transformed Carruth from loyal to embittered
customer: “We bought Whirlpool for our own house, for family and
friends. If one of those goes out in my house right now, it will not be
replaced by Whirlpool.’’
Many companies would probably pay much higher taxes — including
Whirlpool — if Congress eliminated special breaks and lowered the income
tax rate to 25 percent from the current 35 percent.
An extra benefit of winning government subsidies through the tax
code: Recipients remain immune from spending cuts like the automatic
“sequester’’ imposed on March 1.
Called the “tax extenders,’’ 43 credits, deferrals, and exceptions
for general business and energy firms were lumped into the fiscal cliff
legislation. The returns on lobbying investments companies realized when
the Senate passed its fiscal cliff bill helps explain why Washington
tax lobbyists remain in demand:
- Multinational companies and banks, including General Electric,
Citigroup, and Ford Motor Co., with investment earnings from overseas
accounts won tax breaks collectively worth $11 billion — a return on
their two-year lobbying investment of at least 8,200 percent, according
to a Globe analysis of lobbying reports.
- Hollywood production companies received a $430 million tax benefit
for filming within the United States. As a result, companies like Walt
Disney Co., Viacom, Sony, and Time Warner — with the help of the Motion
Picture Association of America, chaired by former Connecticut senator
Christopher J. Dodd — realized a return on their lobbying investment of
about 860 percent.
- Railroads lobbied on a broad array of issues, a portion of which
yielded $331 million for two years’ worth of track maintenance tax
credits. Return on investment: at least 260 percent.
- Even at the low end of the economic scale the returns can be large.
Two West Coast companies that manufacture electric motorcycles — Brammo
Inc. of Oregon, and Zero Motorcycle Inc. of California — reported
combined lobbying expenditures of $200,000 in 2011 and 2012. They won
tax subsidies payable to the consumers who buy their products worth an
estimated $7 million. The electric motorcycle market stands to receive a
return on that investment of up to 3,500 percent.
Like each of the industries that won special treatment in the Jan. 1
“extenders’’ corporate tax measure, the electric motorcycle lobby argued
that tax breaks would protect or create jobs. Electric motorcycle
manufacturers only employ hundreds of workers now, said Jay Friedland,
Zero Motorcycles vice president, but could employ thousands in the
future.
“There are definitely provisions in the extenders that people scratch
their heads at, but if your goal is to build a replacement for the pure
oil economy, this is the kind of industry you want to make an
investment on,’’ he said.
Measuring the rewards for lobbying on individual tax provisions is by
nature imprecise, especially for large corporations that weigh in on
dozens of issues. Companies file blanket disclosure reports that do not
break down their lobbying expenditures by individual issue.
Publicly traded companies like Whirlpool with narrower lobbying
agendas, and who publish their annual tax credit benefits in shareholder
disclosure reports, are easier to track.
In addition to seeking tax breaks, corporate lobbyists also seek to
protect favorable elements that are already baked into US tax policy.
Private equity firms, for instance, fight each year to defend the tax
treatment of “carried interest’’ payments for investment managers. Those
payments are treated as a capital gain by the Internal Revenue Service,
and thus taxed at a much lower rate, 20 percent in 2013, than the top
income-tax rate of 39.6 percent.
The best-known example of a millionaire benefiting from “carried
interest’’ tax treatment was Mitt Romney, the 2012 Republican
presidential nominee, who reduced his individual tax rate to below 15
percent by applying the provision to his extensive Bain Capital profits.
The publicity surrounding Romney’s tax returns fueled an onslaught by
critics. The private equity industry’s trade group and the nation’s
largest firms spent close to $28 million on lobbying in 2011 and 2012,
according to public records. So far, they have won — a benefit that the
Obama administration has estimated is worth at least $1 billion over two
years. The return on investment for maintaining the status quo on the
carried-interest tax rate over two years was at least 3,500 percent.
The returns show how cheap it is, relatively speaking, to buy political influence.
“It’s an end run around policy, and that makes it very efficient,’’
said Raquel Meyer Alexander, a professor at Washington and Lee
University in Virginia who has examined the investment returns on
lobbying. “Firms that sit on the sidelines are going to lose out.
Everyone else has lawyered up, lobbied up.’’
Critics lament that fiscal combat between Republicans and Democrats is preventing serious reform of the business tax code.
“What we’re doing is running a Soviet-style, five-year industrial
plan for those industries that are clever enough in their lobbying to
ask all of us to subsidize their business profits,’’ said Edward D.
Kleinbard, a former chief of staff at the Joint Committee on Taxation
and now a law professor at the University of Southern California.
“These are perfect examples of Congress putting its thumb on the
scale of the free market,’’ he said. “I’ll be damned if I know why I
should be subsidizing Whirlpool.’’
Congress has the opportunity every two years to stop doling out a
good portion of these favors. A peculiarity of many special tax breaks
is that Congress places “sunset’’ provisions on them.
Some observers say passing temporary tax breaks gives lawmakers an
ongoing source of campaign funds — from companies that are constantly
trying to curry favor to get their tax credits renewed. Others say it’s
because making these tax rates permanent would require a 10-year
accounting method — a step that would show how much each provision is
truly costing taxpayers.
Whatever the reason, Congress has made many of them quasi-permanent, by simply extending them again and again.
“It’s the same cowardice that Congress has on everything. They don’t
want to be truthful about what they are doing,’’ said Senator Tom
Coburn, an Oklahoma Republican and persistent critic of government waste
and special deals in the tax code.
Coburn voted against the raft of “extenders’’ when they were
previewed and approved by the Senate Finance Committee at a hearing in
August 2012. He offered amendments to strip individual tax breaks out of
the package — including the high-efficiency appliance tax credit for
Whirlpool and GE — but they were shot down by the majority Democrats on
the committee, led by chairman Max Baucus, of Montana.
“It’s not about tax policy, it’s about benefiting the political class
and the well-connected and the well-heeled in this country,’’ Coburn
said in an interview. “We’re benefiting the politicians because they get
credit for it. And we are benefiting those who can afford to have
greater access than somebody else.’’
Whirlpool pursues its Capitol Hill agenda from an office suite it
shares on the seventh floor of a building on Pennsylvania Avenue that is
loaded with similar lobbying shops and sits just a few blocks from the
Capitol. Across the street, lines of tourists wait to view the original
Declaration of Independence and the Constitution at the National
Archives.
Whirlpool and other appliance manufacturers won tax breaks for
producing high-efficiency washing machines, dishwashers, and
refrigerators in 2005, as part of a sweeping package of energy
incentives approved by the Republican-controlled Congress.
But that victory was just the beginning of a prolonged effort.
Whirlpool and other appliance manufacturers must perpetually work to win
renewal of their credits every two years or so. In recent years, the
company has spent around $1 million annually on lobbying, up from just
$110,000 in 2005.
The fiscal cliff legislation represented the third time the appliance tax credits were included in a tax extenders bill.
Defending the credits has become easier, said a person who has
participated in Whirlpool’s lobbying efforts. The extenders, this person
explained, is an interlocking package of deals, each with a particular
senator or representative demanding its inclusion.
“Some of it is the inherent stickiness of something that is already
in the tax code,’’ said the person, who was not authorized to speak
about Whirlpool’s efforts and requested anonymity. “If they open
Pandora’s box and start taking things out, it’s politically very
difficult.’’
The paradoxical posture of senators of both parties was on full
display at the hearing last summer of the Senate Finance Committee to
consider the most recent package of tax extenders. Some members lamented
the system of doling out tax breaks, pledging to reform the corporate
code, even as they defended individual items in the legislation and
voted to approve it.
The senators said they wanted to provide stability and predictability
for businesses that had come to rely on the temporary provisions to
stay afloat and retain workers.
They did make an effort to trim the package: Some 20 provisions were
left on the cutting room floor, according to data cited in committee.
The panel ultimately approved the bill with a bipartisan, 19-to-5
majority.
Senator Debbie Stabenow, a Democrat from Michigan, went to bat for
Whirlpool and other companies who she said are creating next-generation
appliances that save water and electricity.
“We have one of those major world headquarters in Michigan — and it’s
amazing what they are doing,’’ she said. “Right now, we are exporting
product, not jobs,’’ she added, without mentioning Whirlpool’s Arkansas
plant closure last year.
Former senator John F. Kerry, another member of the committee, said
certain industry sectors need temporary tax subsidies. Oil and gas
companies, Kerry explained, benefit from permanent tax breaks in the
law, while the wind, solar, and other alternative energy interests are
forced to come to Congress “hat in hand’’ every two years.
Coming “hat in hand’’ in this context means deploying teams of
lobbyists, mostly former Capitol Hill aides. They left their government
jobs with an understanding of the tax code and, working in the private
sector, are able to leverage their political connections to gain access
to congressional leaders and staff.
Among the busiest and most influential of these tax-lobbying teams is
Capitol Tax Partners, a firm headed by Lindsay Hooper, and his partner,
Jonathan Talisman. Hooper served as a tax counsel to a senior
Republican on the Senate Finance Committee in the 1980s. Talisman held
the post of assistant treasury secretary for tax policy during the
Clinton administration. They did not respond to requests for comment.
Capitol Tax Partners lobbied on behalf of 48 companies in 2012,
according to its mandatory disclosure reports. That client roster
includes a bunch of companies that won tax breaks in the fiscal cliff
bill: Whirlpool (energy-efficiency tax credits), State Street Bank (tax
treatment of offshore investment income), and the Motion Picture
Association of America (tax breaks for domestic film production), to
name a few.
In Whirlpool’s case, Capitol Tax Partners and other boutique tax
lobbyists helped the company win access to key lawmakers, said the
person who has participated in the company’s lobbying efforts.
“There is a certain amount of door-opening and phone-call-answering
quality of some of these firms that can be useful to make sure that you
are getting your message to the right person at the right point in
time,’’ the person said. “But on the substantive issues, these were done
by the energy-efficiency advocacy groups and the companies
themselves.’’
After the Senate Finance Committee approved the tax extenders package
last summer, it remained uncertain when it would materialize on the
Senate floor for a final vote. Insiders kept their eyes peeled as the
rancorous debate over the fiscal cliff — whether taxes would rise on the
middle class wealthy — drowned out any voices discussing corporate tax
reform.
Nothing was certain, until majority Democrats rolled out their bill
on New Year’s Eve. With tax increases for the rich included, it would
raise $27 billion in new revenue in 2013. The Obama administration
trumped that figure as helping to reduce the deficit.
But in reality, any gain from taxing the rich was easily eclipsed by
waves of tax cuts in the bill — including the $67 billion in the
corporate tax breaks that had been resurrected at the last minute and
voted on early on Jan. 1.
“They finally do it, and the extenders were bigger than the tax
increases on the rich,’’ said Robert McIntyre, director of the advocacy
group Citizens for Tax Justice. “Wow. What was this fight about?’’