Business interests focused on the debate over the looming “fiscal cliff” are most concerned with making sure there’s a timely deal — any deal.
The details of the compromise are less important than getting an agreement in place that removes the danger of a one-two punch to the economy that would flow from trillions of dollars’ worth of tax increases and across-the-board spending cuts set to go into effect next year.
If that crisis is averted, however, expect a more intense focus on the details of corporate tax reform, an issue that Congress is expected to take up once the cliff crisis subsides.
Leaders in both parties say they’d like to simplify the tax code for businesses next year. President Obama and congressional Republicans support a compromise that would pay for lower corporate tax rates by eliminating loopholes and deductions in the code.
Overall, businesses also cheer that move, but each of those tax breaks has specific companies and industries rooting for its survival.
And those corporations that pour lobbying dollars into trying to control their tax bills usually benefit substantially, according to several new academic studies.
One group of accountants, from the University of Mississippi and the University of Nebraska, found that companies that invest in lobbying pay roughly one percentage point less in taxes.
The research fits into a body of work proving the effectiveness of money invested in lobbying. Other studies have found that companies that lobby have 2 percent higher stock returns than non-lobbying peers and that hedge funds connected to lobbyists outperform other funds.
Janet Meade, an accounting and tax professor at the University of Houston, has found that many companies are just looking to hold onto their current benefits, which often need to be extended year after year.
“A lot of lobbying is sort of a protective measure,” Meade said. “They’re lobbying defensively, just trying to keep what they already have.”
If lawmakers succeed in simplifying the code, expect lobbying on taxes to decrease as companies no longer need to defend their low bills.
When firms are seeking new tax breaks, every dollar spent on lobbying translates to a return of up to $50, according to Meade’s research. That’s a remarkable finding, but she points out that companies will only invest in the lobbying effort if it has a high likelihood of succeeding.
“Congress has a strange way of handing things out,” Meade said. “There are some things in our tax law that I think would surprise the average American.”
Certain industries are likely to benefit more than others in any kind of “lower the rate, broaden the base” approach to reform, no matter the details. Retailers in particular get few breaks and end up paying some of the highest effective tax rates under current law, Meade said.
Although it’s often the Republican Party that opposes new taxes, companies controlled by Republican executives are more likely to pay higher taxes, according to another recent paper. The authors, from the University of Arizona and the University of Georgia, suggest that the reason for the difference is that conservatives, who are less tolerant of risk and uncertainty, tend to choose more predictable tax strategies for their companies.
If the managers of a company incline toward the GOP, the company pays about $12 million more in taxes, or an additional 2.2 percent, on average, according to the study, which also found that about two-thirds of business executives lean Republican, dominating in every industry except for entertainment.
For more Influence Industry columns, go to washingtonpost.com/fedpage.