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 Sunday CBS’ 60 Minutes ran an expose on new corporate tax havens. Leslie Stahl, reporting the story, interviewed Cisco Systems CEO John Chambers who stated that companies located offshore to avoid the thirty-five percent U.S. corporate tax rate wanted to repatriate their earnings at a lower rate. Chambers stated that the money was “trapped,” a term that Stahl echoed. Never mentioned in the story was that Chambers is leading a coalition of corporations and trade groups, including the powerful U.S. Chamber of Commerce, to lobby Congress and the Obama administration for a tax repatriation holiday.

The WIN America Coalition is a collection of seventeen corporations and four trade groups advocating for a one-time tax repatriation holiday. The coalition consists of some of the biggest corporate backers of the Obama Administration including Duke Energy, Google, Microsoft, and Pfizer.

The seventeen corporations spent over $50 million on lobbying in 2010 and employed some of the best tax lobbying firms in Washington. Cisco’s lobbying operation is heavily focused on taxes, with the firm Ernst & Young, which employs numerous former staffers of congressional tax writing committees, leading the way.

One of Ernst & Young’s lobbyists is Nick Giordano, former chief tax counsel to the Senate Finance Committee and legislative director for Finance Committee Chairman Max Baucus. He is one of forty-three former staffers of congressional tax writing committees that were hired by the WIN America companies in 2010.

According to data obtained from the Center for Responsive Politics, seventy-eight percent of the WIN America corporation lobbyists have previous government experience.

Twenty-six of those lobbyists previously worked on the Senate Finance Committee or for members of the committee; sixteen worked on the House Ways & Means Committee or for committee members; five worked at the Treasury Department; and one worked for the Joint Committee on Taxation.

The coalition also employed two former members of Congress as lobbyists in 2010. Former Sen. Tim Hutchinson and former Rep. Bob Livingston were both employed by Oracle America.

While the Obama administration has remained cool to the idea outside of a total overhaul of the corporate tax system, it may take notice as many of the WIN America companies are likely to be financial supporters of the president's reelection campaign.

Recently, President Obama reached out to the Silicon Valley community in a private sit-down with tech executives and the venture capitalists funding new projects. Those companies included WIN America members Apple, Cisco Systems, Google, and Oracle. These four combined to donate $1.3 million to the 2008 Obama campaign. Duke Energy, another WIN America member, is providing a $10 million line of credit to fund the Democratic National Convention in Charlotte, North Carolina next year.

The companies involved in the coalition are part of a growing trend of companies shifting profits and earnings overseas to avoid paying taxes at the thirty-five percent rate. Google’s tax rate is around two percent; Pfizer’s has dropped to well below the thirty-five percent rate; Oracle’s tax rate is remarkably low, as it has shifted profits offshore.

The firms involved in the WIN America Coalition frame their case for a one-time tax holiday in one way, as Oracle President Safra Catz said, “it will create jobs.”

According to a Congressional Research Service report, the already existing evidence does not support this conclusion. In 2004 the government enacted a tax repatriation holiday as part of a short-term stimulus bill, the American Jobs Creation Act. The CRS Report shows that the holiday increased repatriation of earnings at a lower tax rate, but did not create jobs. In fact, the companies taking most advantage of the holiday cut jobs in the United States after repatriating earnings rather than created jobs.

The report also shows that the majority of the repatriated earnings came from the pharmaceutical and computer/electronic industries. These industries are currently the biggest supporters of the WIN America Coalition.

There is an op-ed in The Hill today by lobbyist Thomas Spulak arguing that the interests that hire lobbyists are the real power-wielders in Washington, not the lobbyists. Fair enough. And Spulak states that lobbyists should consider supporting increased disclosure requirements--of the kind that Sunlight advocates for--to help remove the stain from their profession. That's well and good. But, in this case, I feel like Spulak could have set an example by being a bit more candid in his writing. For example, this part of the op-ed stood out to me:

A recent front-page headline in The Washington Post exclaimed, “The Lobbyists Win by Killing Tax on Liquor.” Another article quoted a senator who was unhappy with the direction of the healthcare debate as saying, “[T]he lobbyists are winning.” From the sound of it, lobbyists must be the most powerful people in Washington. Although a few lobbyists have been known to beat their chests, they are not nearly as powerful as critics would have one believe. It is the interests that lobbyists represent that have the power. When someone complains that lobbyists are winning, they may be acknowledging the lobbyists are representing differing constituency interests so compelling that they cannot be ignored. Before anyone blames corporations, it is not necessarily business that wields the influence. Often it is average Americans for whose interests corporations and other groups mobilize. Take, for example, the headline about the liquor tax. It wasn’t the lobbyists and their clients who killed the tax increase. It was probably concerns that legislators had about the reaction of the millions of consumers who enjoy the occasional drink and who did not want to have to pay more for the pleasure. Those individuals, mostly middle- and lower-income Americans, are a powerful voting bloc.

It may have helped the reader of this op-ed, seemingly about the power of lobbyists, to know that Mr. Spulak is, in fact, a lobbyist for Bacardi, a major rum company that lobbied against said liquor tax. Perhaps, this article isn't so much about the power of lobbyists relative to the interests who hire them, but a clever way to defend a client and their interests. Almost too clever.

(As an aside, I have also been unable to find the Washington Post article that Mr. Spulak cites on the Post site, in Google or in Nexis. I don't get or read the dead tree version of the paper, but I'm under the impression that they don't exclude articles printed in ink from being posted online.)