Tax Break Lobbyists

Tax Break Lobbyists

As noted in the discussion of site location consultants, many corporate subsidy deals are negotiated in secret and designed to assist a single company in the construction of a specific facility. Yet there are other kinds of subsidies--especially tax breaks--that are available to any company that meets certain criteria; in other words, they are entitlements.

Just as companies are not shy about seeking individual subsidy packages when making a major investment, they also do not hesitate to press for changes in state laws and regulations to create new entitlement-type subsidies. In fact, their lobbying techniques are often quite aggressive, going beyond the usual techniques of persuasion and campaign contributions. Large companies will threaten to move operations (and thus jobs) out of the state if they do not get their way. Rather than castigating business for the use of blackmail, legislators and policymakers usually cave in quickly.

One area in which business bullying has been especially egregious is the issue known as Single Sales Factor (SSF). Corporations generally pay state corporate income tax based on a formula that takes into account the size of their payroll, the value of their assets and the volume of their sales in the state. Large, multi-state companies prefer a situation in which the tax is calculated on sales alone. This results in a windfall savings for a firm that may have lots of property and employees in a given state but whose sales are spread out across the country.

One of the most brazen campaigns for SSF was waged in Massachusetts by military contractor Raytheon Corp.--then the state's biggest private employer--in the mid-1990s. Raytheon threatened to move its defense operations out of Massachusetts unless SSF was adopted (and the company got other tax breaks and utility deals from the state). Raytheon estimated SSF would cut its income tax bill by three fourths, from $28 million a year to $7 million.

A lobbying team headed by John Sasso, who had been a campaign aide to Michael Dukakis, engineered a public relations campaign that turned a corporate tax cut into a jobs program. Suddenly, it wasn't the Raytheon tax cut bill; it was the "defense initiative" to help save 117,000 jobs in the state. And these were well-paying blue-collar jobs that enabled people without a college education to make a decent living. The campaign issued endless statistics about the positive ripple effects of Raytheon's payroll and the state's high cost of doing business. Raytheon's campaign peaked in November 1995, when SSF passed both houses of the legislature by large margins. Defense contractors got the whole break as of 1996; other manufacturers got it phased in over five years.

The assumption that the tax breaks would save all of the Raytheon jobs quickly proved wrong. In May 1996--just five months after SSF took effect--the company reportedly offered buyouts to 4,400 of its hourly employees in Massachusetts. By January 1998--two years after SSF took effect and about three years after it first threatened to leave--the company had reduced its Massachusetts head count by 4,100 people or 21 percent. Efforts by labor unions to get the legislature to enact stricter employment criteria were unsuccessful.

Lobbying records later revealed that the 1995 campaign cost Raytheon $573,539--for a tax break that would save it $21 million a year. This was quite an amazing rate of return on its political investment.

After Raytheon and other defense and manufacturing firms got SSF, mutual fund giant Fidelity Investments began pushing Massachusetts for the same perk. In order to gain leverage, Fidelity got Rhode Island to adopt SSF for mutual fund companies and began moving jobs to that state. That did the trick. In 1996 the Massachusetts legislature adopted SSF for the state's mutual fund companies, which in addition to Fidelity include some of the country's largest investment firms.

The bottom line: in less than one year between 1995 and 1996, under the duress of job threats and intense lobbying, Massachusetts radically rewrote its corporate income tax code in ways that would not assure long-term job creation or even job security, but would cost the state treasury a billion and a half dollars over the next decade and shift the burden for public services away from a few favored industries and onto working families and small businesses.

The Illinois Experience

Illinois is another state that caved in to intense business lobbying on behalf of SSF. The state adopted the change in 1998 at the insistence of the Illinois Manufacturers Association and some of its most powerful corporate members. Ameritech, Abbot Laboratories, Deere & Company, Duchossois Industries, Kraft USA, Nalco Chemical and Quaker Oats were reportedly among the companies strongly backing the tax-formula change.

It was no secret that the deal would heavily favor a small number of the big boys. During the debate on an early version of the bill, the Illinois Department of Revenue estimated that just five companies, unnamed, would receive 63 percent of the tax-cut dollars. That's five companies out of some 133,000 that filed income tax returns in the state.

Of course, given how completely unaccountable SSF is, none of the companies getting the huge windfalls would ever be required to create--or even retain--one single job in Illinois. In fact, many did just the opposite. Since SSF began taking effect there, Abbott, Ameritech, Kraft, Motorola, Nalco, Deere and BP/Amoco have announced layoffs totaling more than 9,900 workers.

Lobbying to Preserve Subsidies

In 2004 the Sixth Circuit Court of Appeals threw the economic development world into turmoil when it ruled, in Cuno v. DaimlerChrysler, that an investment tax credit granted by the state of Ohio to a Jeep plant in Toledo was in violation of the Commerce Clause of the U.S. Constitution. The decision, which was appealed to the U.S. Supreme Court, put into question some of the subsidies mostly commonly used by states to lure investment.

Business interests did not wait to see what the High Court would do. They quickly got members of Congress from the affected states (the Sixth Circuit covers Ohio, Kentucky, Michigan and Tennessee) to introduce legislation that would abrogate Cuno by affirming the legitimacy of state economic development subsidies. The bills (S.1066 and H.R. 2471) are being supported by a growing lobbying effort led by business groups and state development officials. Among the players is the Cuno Coalition, which was created by the Council on State Taxation. The bill is awaiting action by Congress.

If the SSF experience is any guide, the business world will do whatever it takes to reverse Cuno and preserve its tax breaks.

Sources

The material on SSF in this section is drawn from Chapters 1 and 4 (and the accompanying notes) of Greg LeRoy, The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation. San Francisco: Berrett-Koehler Publishers, 2005.

For material on the Cuno decision, see: Michael Mazerov, Should Congress Authorize States to Continue Giving Tax Breaks to Business? Washington, DC: Center on Budget and Policy Priorities, revised June 30, 2005; online at http://www.cbpp.org/2-18-05sfp.htm