Business Moves In For The Kill

‘s article in the Washington Post paints a colorful picture of the economics of politics. The bottom line is that historic tax reform is on the horizon:

An army of lobbyists has been mobilizing in the halls of Congress over recent months in anticipation of what could be a monumental struggle later this year over reforming the tax code…

The prospect of a tax overhaul has already kicked the capital’s influence industry into high gear. From corporate chiefs and hedge fund lobbyists to Montana ranchers and Broadway producers, the players have already begun their campaigns, pressing for everything from lowering the corporate tax rate to preserving cherished deductions and, in some instances, inserting new tax loopholes into law. 

Here are some interesting facts that Markon brings out:

  • Lobbying over the tax code has more than tripled since President Obama took office, with the pace accelerating during the “fiscal cliff” debate. 
  • About 440 corporations and business groups spent tens of millions of dollars lobbying Congress and executive branch agencies on tax reform in the third quarter of last year.
  • That number continued to rise in the final three months of the year, up nearly 10 percent.
  • Corporations and business associations predominate, while other smaller groups like unions, educational institutions and Indian tribes are also involved.  More than 125 Washington lobbying and law firms are engaged, employing power lobbyists and high-profile former politicians.

Tax Code Overhaul: the Most Likely Middle Ground

Both the President and the Congress have called for tax reform – the president suppoting “bipartisan, comprehensive tax reform” in his State of the Union speech, and House Speaker John Boehner recently saying that overhauling the tax code is one of the highest priorities.Rep. Dave Camp (R-Mich), chairman of the House Ways and Means Committee,  and Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee have both vowed to push to rewrite the tax code rewrite this year. Ways and Means has already set up 11 bipartisan working groups to pursue the issue further.
 The two parties differ on what tax reform should accomplish. While both parties emphasize  streamlining the code to help businesses compete, many Democrats also want to raise more tax revenue, partly from the wealthy. 
Both parties agree that deductions and credits should be simplified and scaled back, which puts into play some popular but expensive benefits like mortgage interest and charitable donations for individuals and credits for research costs and provisions that allow firms to defer U.S. taxes on profits earned by foreign subsidiaries.

How Much Pressure? An Historical Perspective

Even the most honest in Washington will find it impossible to ignore the pressure. An indication of just what may be coming is illustrated by what happened the last time Congress sought to overhaul the tax code in 1986.  As Congress tried to lower rates and close billions of dollars in loopholes, corporate America put up a powerful struggle. The final bill (TRA 86) was nicknamed the Lobbying Relief Act of 1986. Here’s how bad it got:

Rep. Bill Frenzel, then a junior Republican member of the Ways and Means Committee, was flooded with 300 requests for appointments every day, compared with half a dozen a week during normal times. “It was a mess,” recalled Frenzel, now a guest scholar at the Brookings Institution. When Congress considered limiting popular deductions for mortgage interest and real estate taxes, he recounted, industry lobbyists “beat us to a pulp.”

This time around, with heightened partisanship and the growth in Washington’s influence industry, many observers expect advocacy on an even greater scale. “It will be immense,’’ Frenzel predicted.

Since TRA86, Congress has added new tax breaks to the code. Washington refers to these as tax “expenditures.” These provisions, which include everything from popular benefits for taxpayers with children, college expenses and retirement savings to corporate welfare cost the government more than $1 trillion a year in revenue, according to congressional hearings.

However, tax reform could end up costing even more. In his proposal, House Ways and Means Committee chairman Camp has called for lowering the top corporate tax rate from 35% to 25% and moving to a “territorial” tax system, which would eliminate taxes U.S. companies pay on profits earned overseas and then brought back to the United States. Naturally, many large corporations strongly favor this, stating that it would help businesses compete in the global economy, while many Democrats argue that it would encourage U.S. firms to move their operations, and  jobs, overseas.

Ratcheting Up Campaign Contributions

lobbying stats

As the prospect of tax reform has grown closer, corporate PACs have been contributing more to key figures on the tax-writing committees. For instance,  according to an analysis of 2012 election cycle data compiled by the nonpartisan Center for Responsive Politics:

Baucus and Camp and the ranking members of their committees — Sen. Orrin G. Hatch (R-Utah) and Rep. Sander M. Levin (D-Mich.) — accepted a combined $5.6 million in campaign contributions from corporate interests that lobbied on tax reform…The four lawmakers also accepted $1 million in contributions directly from lobbyists representing corporate interests that lobbied on tax reform.

The Usual Suspects

The oil and gas industry are among the heaviest lobbyists, since Democrats have targeted them for  preferential tax breaks which include deductions that lower taxes on refiners and decrease the cost of oil and gas exploration:

Stephen Comstock, director of tax and accounting policy at the American Petroleum Institute, a trade group, said some energy executives are worried that tax reform could end up being “political.” He said industry representatives are urging that tax measures be based on good policy.

Translation: the industry has been heavily dependent on government handouts.Hedge funds and private-equity companies are fighting a new tax provision on “enterprise value,” which would require fund managers who sell a business to pay taxes according to their personal tax rate, often the top-end rate of 39.6% rather than at the capital gains tax rate of 20% or less.

Licking Their Chops

In general, a scramble for favor is likely seen as a net positive by influential large corporations. As Jess Peterson, vice president of the U.S. Cattlemen’s Association, put it:

Tax reform is coming up, so now is the time. What an opportunity!

Another response:

Now is the time to do this because everything is potentially on the table with tax reform,” he said. “We’re going to keep pushing, so if an opportunity arises we’re right there to take advantage of it.

What To Expect?

Obviously, given the depth of influence of the largest corporations, the balance of the benefits can be expected to go to corporations rather than the average citizen.

The Hopeful Side: Economists say that what’s needed to effect a strong recovery are major government spending, including investment in infrastructure, and the development of an energy policy that favors the technologies of the future over rapidly depleting fossil fuels.  On the hopeful side, to the extent that this can be encouraged through tax reform, the groundwork for strong future economic performance will be laid down. If a meaningful compromise is reached, additional revenues that can stimulate the economy can be gained from scaling back expensive and needless tax breaks for corporations and the wealthy investor class.

The Pessimistic Side:  However, so far, the President has been rather unsuccessful in getting sufficient revenues and investment in stimulus to get a consumer-driven economy solidly back on it’s feet. The recently passed “fiscal cliff” deal,  according to the Congressional Budget Office’s figures, resulted in a meager 3-to-2 ratio of spending cuts to tax hikes over 10 years, consisting of tax increases of about $600 billion, versus spending cuts of about $900 billion. Moreover, the Administration’s proposed budget calls for an additional $2.50 of spending cuts for every $1 of tax increases – prior to compromise.

These headwinds are already strong, with the past 40 years favoring the scaling back of the kind of investment that nurtures a consumerist economy led by a strong middle class. But now that the largest corporations have grown more influential than ever, and have a once-in-a-lifetime opportunity to increase their share of the pie at the expense of the average American worker, expect the pressure on Washington to be more intense than we might reasonably imagine.