If you think you wound up paying too much in taxes this year, maybe you ought to hire a lobbyist. Or two. Or 20. After all, it’s a strategy that seems to be working well for some of the nation’s biggest corporations.

As Americans prepare for tax day 2012, a new Sunlight analysis of lobbying and corporate tax rates finds that among 200 of the largest U.S. companies, the companies that spent the most on lobbying most effectively reduced their reported tax rates between 2007 and 2010.

On average, companies we examined reported paying a slightly lower overall tax rate in 2010 than in 2007 (average tax rate of 29.3 percent in 2010 as compared to 29.9 percent in 2007), with a decline in the median reported tax rate from 31.8 percent to 31.6 percent. Fifty-five percent of the companies paid a lower rate in 2010 than in 2007.

But of the eight companies that spent the most on federal lobbying between 2007 and 2009, seven decreased their overall tax rate between 2007 and 2010. And six of the Big Eight enjoyed a decrease of at least seven percentage points.

Table 1. Changes in reported tax rates

Combined, the Big Eight spent $540 million on lobbying between 2007 and 2009. In total, they filed 332 lobbying reports that mentioned taxes, naming 491 different tax bills over the three-year period we investigated (see table 2).

Table 2. Lobbying on tax bills

Compared to what their taxes would have been if their 2007 tax rates were applied to their 2010 income, we estimate that the seven companies that lowered their taxes saved a combined $11 billion on $120 billion in reported 2010 profits. If we assume that the entire reduction was due to their lobbying, the return on investment would be 2,069%.  Of course, this is probably not the case. Without a detailed analysis of these companies’ taxes, it would be impossible to tell why their rates fell. But we can observe that it is very unlikely that the eight companies that lobbied the most between 2007 and 2009 all would have seen such significant drops in their tax rates by random chance alone.

Statistically, the likelihood of that seven of eight firms that ran up the biggest lobbying tabs all lowering their reported tax rates by chance alone is about seven percent, which makes it highly unlikely but within the real of random possibility (assuming we take the overall probability of an individual company lowering its taxes at 55 percent). Moreover, only 19 of the nation’s 200 highest earning companies reduced their tax rate by more than seven percentage points. Within this universe of companies, the likelihood of six of the Big Eight lowering their rates by at least seven percentage points purely by random chance is less than 1 in 100,000.

Of course, the Big Eight were not unique in lobbying on taxes. More than two-thirds of the nation’s 200 largest companies lobbied on at least one tax bill in the last three years. Of the 182 large companies that reported at least some lobbying during the period, 73 percent lobbied on taxes. Combined, the 182 companies filed 2,405 unique reports mentioning tax lobbying, with a total of 3,600 unique tax bill mentions.

Companies lobby so much because Congress is constantly making changes to the tax code. Between 1987 and 2011, the number of pages in the CCH Standard Federal Tax Reporter (one measure of the growing complexity of the federal tax code) more than doubled, growing from 33,030 pages to 72,574 pages. More than half of those pages have been added since 2001.  In 2005, the President’s Advisory Panel on Tax Reform counted approximately 15,000 separate changes to the tax code since 1986 (more than two a day). “Each one of these changes had a sponsor,” wrote the panel in its report, “and each had a rationale to defend it. Each one was passed by Congress and signed into law.”

It’s not surprising then, that we recently found that a committee seat on the House Ways and Means Committee (which has jurisdiction over tax rates) is worth an estimated $258,000 in extra fundraising. After all, a substantial number of companies appear to be after highly-prized tax benefits. And PAC and employee contributions to committee members are generally an effective way of gaining access. 

Regression analysis

Taking the 200 companies as a whole, we estimate that for each additional $1 million that companies spent lobbying between 2007 and 2009, their 2010 tax rate fell by 7/100ths of a percent. While that might not sound like much, for a $2.5 billion company at the median in our sample of large companies, each $1 million spent on lobbying translates into an estimated annual tax savings of $1.8 million – almost double the original investment, with benefits likely to continue in the future. Table 3 reports the results of a OLS regression estimating companies’ 2010 tax rate as a function of their lobbying totals between 2007 and 2009, controlling for size, industry, and 2007 tax rate. The estimate of a decrease of 7/100ths of a percent is statistically significant, though just slightly.

Table 3. OLS regression results of effect of lobbying on tax rate

(coefficients for industry at 2-digit NAICS code not reported) Adjusted r-squared: 0.4697

However, the result appears to be largely driven by the eight companies that lobby the most. If we remove those companies from the sample, the estimated effect of lobbying on tax reduction drops to 5/1000ths of a percent per $1 million spent on lobbying, with a 35.5% chance of being zero (the absolute minimum for statistical significance is a 10% chance of being zero).

Conclusion

When it comes to paying less in taxes, having an army of lobbyists appears to be helpful. Many companies lobby on taxes, but those who spend the most report the largest and most consistent declines in tax rates. Of the eight companies who spent the most money lobbying between 2007 and 2009 seven saw their 2010 tax rates decline from what they paid in 2007. While it is difficult to show causality, the likelihood of this happening by random chance is less than 1 in 100. And of those eight companies, six reduced their tax rates by at least seven percentage points. Given the larger patterns we’ve observed, the likelihood of this happening by random chance is less than 1 in 100,000. At the very least, we know that the companies that lobby the most are also the  companies who have figured out some way to pay millions less in taxes than they did just a few years ago.

Methodology and sample

Our set of 200 companies includes the largest 200 U.S. companies (ranked by 2010 pre-tax income) that met the following criteria: in both 2007 and 2010 they reported tax rates that ranged between -50% and 50% both years, and their income in 2007 was positive. We did this because we wanted to eliminate cases in which tax rates were likely to be driven by one-time events. This is admittedly not a perfect approach, but we wanted tax rates to be appropriately comparable between the two years and to eliminate outliers.

We calculated the base tax rate using Compustat data, and thus we rely on what companies reported in their financial statements as their pre-tax income and their income tax paid (in this, we follow the approach of Richter et al. 2009, who also find that companies that lobby more pay less in taxes). Our decision to look at the cumulative lobbying over three years is based on the assumption that tax lobbying takes place over multiple years and tax benefits do not always kick in immediately.

The list of companies and their tax and lobbying data can be found here.

Special thanks to Alison Rowland for her help in preparing this analysis.

Correction: Altria's tax rates were originally reported incorrectly. The post has been updated to reflect Altria's correct tax rates.

On Monday I wrote about tax expenditures and their lack of transparency and we published a short quiz on tax expenditures. Today, I’m focusing on tax collection and how we can make it easier for both the user and the government. In a recent report, the GAO noted that enforcement and collection of taxes owed is getting to be a more serious issue and a huge source of lost revenue, estimated at $330 billion at the end of 2010. The GAO also issued two other reports that identified paid tax preparers as part of the compliance problem and also briefed the Senate Finance Committee on tax collection practices in other countries that the US might benefit from. Here’s a table of some of the more interesting tax collection practices in other countries:

source: http://www.gao.gov/products/GAO-11-540T

Instead of looking at discretionary spending and tax spending in separate vacuums, New Zealand analyzes both types of spending by goal. This helps prevent duplicative spending and shows which method of delivery is the most effective. And Finland has the holy grail! Finland has the Tax Card system, a website where users can enter information to accurately calculate their withholding multiple times a year, adjusting for events that increase or decrease their tax liability (Finland also automatically notifies the employer of any changes so the taxpayer doesn’t have to fill out any paperwork). Then, at the end of the year, taxpayers get a prepared tax return that they can either submit as is or make changes to. Government prepared returns are proven to increase compliance in tax collection. They also allowed Finland to reduce its tax compliance staff by 11%! Taxpayer savings all around!

In the US, the state of California has a pilot program that accomplishes the same thing, called ReadyReturn. It’s safe to say that Intuit (the publisher of Turbo Tax) isn’t happy with ReadyReturn. Just check out the Influence Explorer page for Intuit and look at who they contribute to:

(It’s worth nothing that President Obama made a proposal during his campaign to have a pre-filled tax return mailed to tax payers)

Moving the IRS into the digital age not only has benefits for tax payers and increases taxpayer compliance, but it would also make it easier to collect real, historical data on how much money the federal government actually spends on individual tax expenditures and which recipients are benefiting. This data collection is crucial in making tax expenditures more transparent.

To read more, we’ve provided a handy list of resources below. Also, head over to our quiz to see how much you know about tax expenditures!

• The Subsidyscope Tax Expenditure database
• Analytical Perspectives, Budget of the United States
• Joint Committee on Taxation - Tax Expenditure Estimates
• The Center for American Progress’ Tax Expenditure of the Week
• Tax Expenditures and Government Size and Efficiency, by Len Burman and Marvin Phaup
• GAO Report - Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue
• Good Jobs First Subsidy Tracker

It’s that time of year again! With tax day upon us, many people might be wondering where all of their tax dollars are going. For most types of government spending, you can actually research this question. But there’s one type of spending that often goes overlooked by the public and legislators: tax expenditures. I’ve written about tax expenditures and why they’re important, but here’s the quick version: tax expenditures are taxes that weren’t paid to the government because of specialized exemptions for certain groups of people or corporations. Economists generally equate them with federal spending, but they are not subject to the same scrutiny or evaluation as other federal spending. We think that needs to change. In celebration of tax day, Sunlight presents part one of a quick introduction to the world of tax expenditure transparency, along with a super-fun quiz to top it all off!

Tax Expenditures Lack Transparency and Oversight

Chances are, you take advantage of some tax expenditures. If you have children, or pay interest on a mortgage, or fall below a certain income level, then you’ve probably taken advantage of the Child Tax Credit, the Mortgage Interest Deduction, or the Earned Income Tax Credit. If you have taken one of these credits or deductions, you paid an effective tax rate that was lower than the standard tax rate for everyone else with the same income as you. As a result, everybody else’s income tax rate has to be higher. Since I don’t have children or a mortgage, my tax rate is inflated to make up for the lost revenue from tax expenditures like the ones I just mentioned.

That is not to say that all tax expenditures are bad. We aren’t in a position to make judgments about specific tax expenditures. But we are in a position to say that government spending through the tax code is opaque and lacks oversight. Here are some ways in which tax expenditures are less transparent than other types of spending, like grants and contracts:

1. Actual lost revenue is not measured - Only estimates for the lost revenue from tax expenditures are calculated. These estimates are produced by the Joint Committee on Taxation (JCT) and the Department of Treasury, not the IRS. The IRS could go back and measure the actual costs associated with tax expenditures using a sampling methodology, but they don't.
2. Discrepancies between estimates - The two bodies that make estimates (JCT and Treasury) often have widely varying estimates for the same tax expenditures. With both these bodies staying pretty tight lipped about how these estimates are made, it’s hard to know which one is more accurate. For example, Treasury estimates the Earned Income Tax Credit at $4.9 billion for 2010, but JCT estimates $56 billion.
3. Inconsistent descriptions and classifications of tax expenditures - In addition to having a difference of opinion over what we actually spend on tax expenditures, JCT and Treasury also organize, classify and describe tax expenditures differently. Sometimes this makes it incredibly difficult to know if you’re comparing the right estimates across JCT and Treasury.
4. Once enacted, tax expenditures are on autopilot - Just like Otto in Airplane!, most tax expenditures will just sit there, happy and contented forever. Once tax expenditures are enacted, most of them just stay on the books, year after year, without congressional oversight, or even an evaluation of their performance.

With tax expenditures being over 25% of our total spending, they should be under just as much scrutiny as grant and contract spending. Their relative obscurity is the reason they are politically popular vehicles for spending. The only way to keep legislators from using the tax code to enact their private spending agendas is to shine a nice big light on it.

Little Things Can Go A Long Way

There are some things that could happen right away to open up tax expenditures. If the Department of Treasury and the Joint Committee on taxation created a taxonomy, or agreed on a general schema, for reporting tax expenditure estimates, comparing them would be much easier for the average citizen who is not a tax expert or economist. Even just having a common identifier for each tax expenditure would go a long way. They could also release their tax expenditure estimates in a spreadsheet format, instead of a 200 page PDF. These steps require no money, only a little time and collaboration between the branches of government.

In the longer term, Congress could give the IRS a mandate for data collection. They could also institute statutory requirements for the systematic review of enacted tax expenditures and incorporate this review into the budgeting process. The executive branch could facilitate cooperation between the IRS and other federal agencies that disburse direct funding so that they can analyze the effectiveness of both types of spending on the same goals and publish their findings. There are a whole host of measures that could be taken to increase tax expenditure transparency, and we need them now more than ever.

Head over to our quiz to see how much you know about tax expenditures and have a happy tax day!