The diversified conglomerate is likely to spend big bucks on lobbyists as the battle to reshape the U.S. tax code heats up
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Bloomberg; Getty Images; Landov; Zuma Press
In December, President Barack Obama started negotiating with Republicans to extend unemployment benefits in exchange for tax cuts, and that's when the tax commandos sprang into action. Washington's specialty boutiques and its giant lobby shops pressed for retroactive renewal of numerous corporate tax breaks that had expired. Nearly all were reinstated as part of a compromise measure that Congress passed on Dec. 16, a bit of nifty legislative footwork that saved companies about $43 billion in 2011 and 2012 taxes.
One of the biggest beneficiaries was General Electric (GE), which won the right to continue deferring tax on income from overseas financing deals. That includes some earnings that GE Capital, a finance unit that kicked in about a third of the parent company's $150 billion in revenue last year, derives from loans to overseas buyers of GE equipment. "There was an awful lot of lobbying going on," says Kenneth Kies, managing director of the Federal Policy Group, a former chief of staff of the Joint Committee on Taxation and one of GE's many outside lobbyists. Right after the midterm elections, "Democrats didn't know which way was up and Republicans didn't yet have control of the House."
Now the tax-break industry is gearing up for a bigger confrontation. As Congress debates a possible tax code overhaul, companies such as GE may be wary of trading benefits they have in the current system for a lower statutory rate. Win or lose, Kies says, the battle to reshape the tax code "probably would create a lot of new business" for lobbyists.
GE likely will throw some serious money around. The diversified conglomerate spent $4.18 million last year?more than any U.S. company or trade association, according to data compiled by Bloomberg News?on outside lobbyists to preserve favorable tax treatment for its earnings and to win breaks that benefit its renewable-energy business. "The $4 million is just the tip of the iceberg," says James Thurber, who teaches courses on lobbying at American University in Washington. He says disclosure laws use a narrow definition of lobbying that excludes many ways companies influence policy.
All that lobbying has helped GE lower its effective tax rate. According to company filings, GE's consolidated tax rate from 2005 through 2009 was 11.6 percent, including state, local, and foreign taxes. That's well below the 35 percent top federal tax rate for U.S. corporations and the 30.5 percent average for companies in the Standard & Poor's 500-stock index.
Losses at GE Capital stemming from the financial crisis helped the parent company lower its tax rate for several years. Still, GE's average rate before the crisis, from 2002-07, was 17.5 percent?higher than now, but below the mid- to high-20 percent range that many large U.S. companies paid in the same period.
GE's preferential tax treatment forces other taxpayers to pick up the tab for health-care programs, national defense, and the rest of the federal budget, says Dean Baker, co-director of the Center for Economic Policy and Research, a left-leaning think tank. "No one thinks that tax incentives are being dished out based on their merit," he says. "This encourages disrespect for the tax code." Baker adds that it's "very hard to tell a struggling small business why they should be honest and pay their taxes when the big companies are hiring lobbyists to get out of their tax liability."
The break that was renewed in December, formally known as the active finance exception, allows GE and other manufacturers such as Caterpillar (CAT) to finance overseas customers' purchases of big-ticket items, creating jobs back home and increasing U.S. exports. The provision also allows it to compete with banks outside the U.S. by deferring U.S. tax on earnings from such financing activities.
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