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How Business Found
By Eric Pianin
The Fund-Raising Frenzy of Campaign '96
A four part series:
Part One: The scandals of the 1996 campaign have led to intense pressure to overhaul the electoral system.
Part Two:Washington may be the epicenter of campaign abuse, but it was places like Pennsylvania's 21st Congressional District where the excesses played out.
Part Three : Congress has given billions in tax breaks to industries and interest groups that contribute heavily to congressional campaigns.
Part Four (Wednesday): The 1996 campaign revealed the Federal Election Commission to be weak, slow footed, and largely ineffectual.
But congressional benevolence extended far beyond blue-collar beneficiaries. Buried in the bill's fine print were a raft of benefits custom-designed not for the working class but for well-heeled business interests.
Under pressure from companies and trade groups, the 104th Congress converted a straightforward wage bill into a $21 billion bonanza of tax breaks for corporate America -- from pharmaceutical companies and soft-drink makers to pizza chains and convenience store operators.
The boost to business from a Republican-controlled Congress reflected both fundamental GOP philosophy and the political instinct to help constituents back home. But money also played a role in the transformation of the minimum wage bill -- money generously ladled by corporate beneficiaries into the campaigns of those whose help on Capitol Hill they needed most.
President Clinton signs the minimum wage increase into law at an August 20, 1996 ceremony at the White House. He spent barely a minute listing the legislation's tax benefits for business, stressing instead that the new law would allow people to "keep their families together."
Special interests have long used campaign contributions to push their legislative agendas, but the link between campaign cash and HR 3448, as the minimum wage bill was formally known, was bold, the magnitude of money impressive. Moreover, the bill illuminated both the traditional and emerging roles of money in political campaigns.
In the traditional approach, individuals or corporations contribute money to politicians, seeking legislative favors in return. In the emerging role, politicians use legislation to curry favor with powerful groups and special interests, encouraging them to invest "independently" on behalf of one party's candidates.
The old game operates across party lines: Corporate political action committees contribute to members of both parties, then count on their support for legislative goodies. The new game, however, is partisan. The minimum wage bill, for example, helped encourage organized labor to devote a $35 million independent campaign to defeating Republicans, while Republican-sponsored tax breaks for small business encouraged the powerful National Federation of Independent Business (NFIB) to mobilize independently to protect many vulnerable GOP incumbents.
The wage increase -- aggressively promoted by the Democrats and reluctantly embraced by the Republicans -- became but a portion of a bill given over largely to corporate benefits. By the time the bill became law, it was "an ugly little piece of work that was welcomed on both sides of the aisle," said Rob Shapiro, vice president of the Progressive Policy Institute, a Washington think tank.
About $11 billion of the overall $21 billion in new tax breaks over the next decade goes directly to members of the NFIB; closely aligned with House Republicans, the group's political action committee contributed $1.2 million to key congressional candidates during the 1996 campaign.
Corporate giants such as Johnson & Johnson, Pfizer Inc., General Electric Co., Coca-Cola Co. and others, which through their PACs funneled $2.1 million in 1995-96 into the campaigns of members of tax-writing committees, also managed to hang on to a long-standing if controversial tax credit worth $18 billion to them over the coming decade.
Preserving that credit was so important to business that Haley Barbour, then chairman of the Republican National Committee, intervened on behalf of the pharmaceutical industry and other corporations to try to save it. While Barbour was battling for the drug companies, his former law firm was a registered lobbyist for the country's premier pharmaceutical trade organization. Barbour returned to that law firm last month, after stepping down as party chairman.
In all, corporate and industry political action committees funneled $12.3 million to the 1996 campaigns of House Ways and Means Committee members, all but three of whom supported the bill, according to an analysis prepared by the Center for Responsive Politics, a campaign finance watchdog. Over the past six years -- or one full election cycle in the Senate -- these same corporate PACs lavished $24.3 million on members of the Senate Finance Committee, where the bill was approved June 12 by a voice vote.
The PAC spending was in keeping with a surge in corporate giving to congressional candidates over the last decade. For the 1996 races, corporate PACs showered House and Senate candidates with more than $77.5 million -- twice as much as they spent a decade ago, according to Federal Election Commission figures.
Corporations, which stand to gain or lose huge amounts each time Congress tinkers with tax laws, view such giving as a way of creating a "favorable climate" so that legislators will be predisposed to listen and act in their behalf when an opportunity presents itself, according to lobbyists and congressional staff members. They insist that it is rarely a simple quid pro quo arrangement, a blatant exchange of campaign cash for legislative favor.
But as former representative Sam Gibbons (D-Fla.), a onetime Ways and Means Committee chairman who retired last year, explained: "Members are only human. You can't entirely disassociate yourself from something like a campaign contribution. How much it impacts on you and how far you're willing to move from your own principles is something each member has to decide for himself."
Nevertheless, corporate lobbyists who want "to be taken seriously" feel intense pressure from politicians to contribute money, according to lobbyist Lawrence F. O'Brien III.
For those who want to "be part of the scene" on Capitol Hill, O'Brien added, cash is the price of admission.
Few proposals were more loathsome to Newt Gingrich's Republican Revolution than the Democrats' call for an increase in the wage law setting the bare minimum employers could pay their hourly workers. Republican feelings ran so strong that House Majority Leader Richard K. Armey (R-Tex.) vowed to oppose a minimum wage increase "with every fiber of my being."
But by early last spring, with President Clinton and Democrats pushing the cause, House Speaker Gingrich (R-Ga.) reluctantly concluded that passage of a minimum wage increase was inevitable in an election year.
In April, the AFL-CIO launched a blistering media campaign in 31 congressional districts, berating GOP House members for opposing an increase. Panicky Republican moderates responded by touting their own minimum wage bills. Gingrich realized that unless the leadership went along, it risked losing control of the House to a coalition of Democrats and GOP moderates.
Small business owners argued that they would be able to hire fewer people for entry-level positions if the minimum wage were boosted, and Gingrich needed a way to make it easier for business leaders and conservative Republicans to accept this setback. He turned to the 600,000-member NFIB. The speaker wanted both to warn NFIB leaders, who had supported Republican economic policy, and to ask what he could do to sweeten the package for small business operators.
What happened next set the stage for a marriage between the Democrats' minimum wage increase and a Republican grab bag of business tax breaks. Gingrich divulged his strategy to two NFIB leaders on April 18.
"We need to be able to say that while we're doing something that kills jobs, we're doing other things to create jobs," Gingrich told the officials, according to a participant. "So you guys need to tell us items on your agenda that fit that bill. Just give us the list."
The alliance between the NFIB and Republicans had been building since 1994, when the federation became the first business group to oppose Clinton's health care plan. Money played a special role in the relationship. After Republicans took control of Congress in the 1994 elections, the NFIB boosted its lobbying budget and tripled PAC spending -- from $371,000 in the 1994 campaign to $1.2 million in 1996. In all, the NFIB's PAC contributed to nearly 300 House and Senate candidates, most of them Republicans.
The NFIB and other groups representing retail merchants had been solicitous of tax writers, according to the Center for Responsive Politics analysis. Retail sales groups accounted for more than $546,000 contributed to members of the Ways and Means and Finance committees during the past campaign cycle.
But money was not the NFIB's only tool. The group also pressured members of Congress in a letter-writing campaign and urged store owners to display posters supporting their causes. NFIB members took part in get-out-the-vote efforts and purchased radio ads for Republican candidates.
"The actual money is an important part of what we do, but not nearly the whole picture," said Mark Isakowitz, NFIB's chief House lobbyist. "We're the only group in town that can say to a member of Congress that if you're not with us, we can send letters to 15,000 of our members back in your district saying you're an ass."
Within days of their conversation with Gingrich, NFIB leaders presented him with a one-page list of tax breaks and other changes they said would make a minimum wage increase more tolerable, if not acceptable. Foremost was a long-sought proposal that would allow small businesses to deduct up to $25,000 of a major equipment purchase, such as a computer system, in the first year -- an increase from the $17,500 previously allowed. This seemingly innocuous provision came at a high price to the U.S. Treasury: $4.7 billion over 10 years, according to a congressional Joint Committee on Taxation estimate.
That proposal became the centerpiece of a bill drafted by Ways and Means Committee Chairman Bill Archer (R-Tex.) at Gingrich's behest. Archer's bill also loosened requirements for forming corporations under a part of the tax code known as "subchapter S" -- a tax-friendly form of business organization often used by small businesses and family-owned firms. It reshaped the pension law, wiping out or diluting many compliance rules for small businesses and allowing them to create new plans with tax advantages for employers as well as workers.
Archer tried to limit the bill's scope to tax breaks for small businesses that would be hurt most by a wage increase. "The one thing we wanted to do on the House side was to keep it from being made into a Christmas tree with all kinds of tax provisions," Archer later explained.
Nevertheless, huge chains such as Pizza Hut Inc., Domino's Pizza Inc. and Godfather's Pizza also reaped a reward when the committee expanded a special restaurant tip credit that will save pizzerias and other food delivery restaurants at least $165 million over 10 years. The credit allows the restaurant owners a break on Social Security taxes paid on tips received by their workers who deliver food off the premises. The bill was overwhelmingly approved by the House committee May 14. The House approved the tax breaks and the minimum wage bill, merging them into a single measure, which was sent to the Senate.
Last Train to Tax Relief
By the time HR 3448 reached the Senate, K Street lobbyists and business interests had come to view the bill as "the last train leaving the station" in the 104th Congress. Finance Committee members began loading the legislation with tax breaks, more than doubling the bill's cost.
The clearest winner in the Senate round was the 2,200-member National Association of Convenience Stores, another group that combined grass-roots lobbying with strategic campaign contributions. Its members range from the giant Dallas-based Southland Corp.'s 7-Eleven chain to much smaller operators with names such as Love's Country Stores of Tulsa and Kum & Go of West Des Moines.
The operators' chief tax concern was a technical question with a big economic impact on stores that sell gasoline and petroleum products. Since 1986, these combination convenience store-gas stations had used the same 15-year schedule as traditional gasoline stations in writing off, for tax purposes, the cost of equipment and property. In other words, a convenience store could deduct one-fifteenth of the cost of new equipment and property annually.
But in 1994 the IRS had issued a ruling that, in effect, raised the taxes of every convenience store-gas station in America. The IRS ruled that the stores were no different from other commercial establishments -- that they were not entitled to the gas stations' schedule -- and would have to use a 39-year depreciation rate, which meant a much smaller annual tax benefit. The only exception was if the store could prove that at least half its income was derived from petroleum sales and half its floor space was devoted to petroleum products.
That change meant an additional $452 million in potential IRS revenue over 10 years. Incensed operators turned to Congress for relief.
This issue, like many others addressed in the minimum wage bill, was debated twice in Congress -- first in 1995 as part of a Republican tax bill vetoed by the president and again last year. Throughout that period, the convenience stores' PAC gave $446,696 to House and Senate candidates. With 65,000 stores operating in congressional districts across the country, association members had little trouble getting tax-writers' attention.
Reps. John Lewis (D-Ga.) and Mac Collins (R-Ga.), both Ways and Means Committee members, responded to pleas from Atlanta-based Racetrac Petroleum Inc., which operates 300 stores, and Flash Foods of Waycross, Ga., with 60 outlets, to press for reversal of the IRS ruling, according to association officials. The Georgians enlisted other committee members' support and urged Archer to include a provision for the stores in the 1995 tax bill. But Archer declined to address their problem in the House bill. Once it reached the Senate in October 1995, however, the operators found crucial allies on the Finance Committee.
With prodding from Sens. Charles E. Grassley (R-Iowa), Don Nickles (R-Okla.) and Max Baucus (D-Mont.), the Senate inserted a provision reversing the IRS. Grassley argued that the IRS had contravened congressional intent and that the provision was important to Iowa, home to Casey's General Stores, a major employer with 950 outlets.
"Obviously in rural America you have just a heck of a lot of convenience stores," he said in an interview to explain his support.
Neither Grassley nor Nickles was up for reelection and neither received a contribution from the convenience stores' PAC that year. Baucus, however, was preparing for a tough reelection battle and received $5,000 from the association PAC on Oct. 23, 1995, four months after the Finance Committee approved the provision.
On Oct. 31, Collins and Lewis wrote to Archer urging him to accept the Senate convenience store provision when it came time for the House and Senate to negotiate a compromise. Collins signed the letter one week after receiving a $5,000 contribution from the convenience stores' PAC, FEC records show.
The following spring, when the minimum wage and tax package was being assembled, the House version of the bill still included nothing for the convenience store operators. But as the Senate Finance Committee made a final run through the measure in mid-June, Sens. Baucus, Grassley and Nickles again insisted that the provision be included.
A month later, on July 22, Baucus's campaign received $1,000 from the convenience stores' PAC. That was followed with a $4,000 donation on Sept. 17, for a total of $10,000, the legal limit for the campaign cycle. Lewis, who continued to press for the measure, received $2,500 from the convenience operators on July 16. Baucus has declined to comment.
Senators added other expensive ornaments that had little to do with softening the minimum wage impact. Finance Committee members from western states, for example, obtained a one-year extension for a half-dozen synthetic fuel production companies to qualify for $522 million in tax credits.
Some of the largest and most powerful U.S. corporations won a battle over the fate of "Section 936," a tax credit that for years had provided billions of dollars in subsidies to pharmaceutical, electronics and soft-drink manufacturers. The beneficiaries made up a Who's Who of American business: Johnson & Johnson, Bristol-Myers Squibb Co., General Electric, Hewlett-Packard Co., Coca-Cola, PepsiCo Inc. and dozens of others.
The tax credit, first enacted in 1976 to lure industry to economically depressed Puerto Rico, initially granted a 100 percent exclusion from U.S. taxes to businesses investing in Puerto Rico. That later was scaled back after critics denounced the measure as corporate welfare. By early 1995, House Budget Committee Chairman John R. Kasich (R-Ohio) wanted to abolish the subsidy altogether, partly to offset the cost of Republican tax cuts. Left unchanged, the subsidy would cost the Treasury $20 billion over five years.
Corporate executives and lobbyists descended on Capitol Hill to battle Kasich's proposal. Political action committees from companies threatened by the loophole's repeal pumped $2.2 million into the campaigns of key members, election finance records show.
Pharmaceutical and health products companies contributed $1.1 million; their strongest champions received the fattest checks. Sen. Orrin G. Hatch (R-Utah), for example, received $150,637; Sen. Alfonse M. D'Amato (R-N.Y.) collected $33,450; and Sen. John H. Chafee (R-R.I.), $75,000. On the House side, Rep. Phil Crane (R-Ill.), a staunch advocate of the subsidy, received $22,328.
The corporations also had a secret weapon -- Haley Barbour. In September 1995, the party chairman quietly approached Archer, Gingrich, Kasich, then-Senate Majority Leader Robert J. Dole (R-Kan.) and others to argue against repeal of Section 936. Barbour insisted that closing the loophole was tantamount to raising taxes on the corporations, which was contrary to GOP philosophy.
"I thought our position as a party, generally speaking, was against tax increases, period," Barbour said in an interview in which he confirmed the conversations.
While Barbour was making his pitch, his former law firm, Griffith & Rogers, was on the payroll of the Pharmaceutical Research and Manufacturers of America, according to congressional lobbying records. Barbour, now once again a senior partner in the firm, insists he had merely engaged in a philosophical discussion with congressional leaders and hadn't intended to "carry water" for the pharmaceutical industry.
Even with such firepower, the corporate coalition couldn't totally save Section 936. Congress voted last summer to eliminate the subsidy for future investments in Puerto Rico, but softened the blow by allowing corporations already there to continue using the tax break for another 10 years. To sweeten the deal, Republican lawmakers also inserted a tax break, worth a half-billion dollars over 10 years, that repealed a provision making it easier for the IRS to tax the overseas investments of multinationals such as Hewlett-Packard and Intel Corp., according to Republican congressional aides.
The President's Emphasis
The final version of HR 3448 passed the House and the Senate on Aug. 2. Clinton signed it into law on Aug. 20 during a ceremony on the South Lawn of the White House. The president spent barely a minute listing the tax benefits for small businesses in the measure.
The larger point of his speech was that passage of the minimum wage legislation was a big victory for the "working people of America."
"For many, this bill will make the difference between their ability to keep their families together and their failure to do so," the president declared. "These people reflect America's values, and . . . it's about time they got a reward and, today, they'll get it."