Research

Corporate campaign contributions add up to lower tax rates

Many corporations lobby the U.S. Congress, but are these efforts effective? Assistant Accounting Professor Jennifer Brown examined corporate political contributions and found that firms taking a long-term, relationship approach with tax policymakers fare better than peers who stand back or wait for an issue to arise.

2015-03-23

To some observers, the world of corporations and politicians is one of “you scratch my back, I’ll scratch yours.” To others, it’s a world in which corporations establish ongoing relationships with policymakers — relationships that over time result in a seat at the table and generate greater benefits. But linking either approach to specific outcomes has been notoriously difficult.

Now, at least when it comes to corporations’ tax rates over the long run, a W. P. Carey assistant professor of accountancy has shown that corporations that take a long-term, relationship approach with tax policymakers in the U.S. Congress fare better than their peers. Jennifer Brown and former graduate students Katharine Drake and Laura Wellman gathered years of data from Federal Elections Commission reports and Center for Responsive Politics databases and compared it to corporate financial reports.

Over time, Brown’s team found, that there is a pattern in which contributions made to tax policymakers are followed later by lower and less volatile effective tax rates for firms whose corporate political action committees made such contributions. Brown cautions that the research does not say that making campaign contributions to tax policymakers causes a corporation’s tax rates to drop. But it does show the value of relationships versus sporadic contact with tax policymakers.

“You can’t just wait and get in when your issue comes up on the table,” she said. “You have to already have an established relationship with these policymakers to have your voice heard. That’s really what our research shows. Those people who have made a long-term investment are the people who get the benefit in the end.” Considering the ongoing talk in Washington about tax reform, the findings are an important clue to who and what to watch for in any tax-related legislation, Brown added.

A former tax consultant with PricewaterhouseCoopers, Brown likes to take theories and apply them to the real world of taxation and tax planning. This latest research provides insight into how corporations’ political activity can literally help their financial statements’ bottom line. Specifically, Brown and her colleagues found:

• Firms that take a more relational approach to corporate political activity have lower future cash and generally accepted accounting principles effective tax rates and less volatile future cash effective tax rates, than firms that don’t make similar investments with their political action committees.
• The more candidates a corporate political action committee supports, and the longer the PAC supports those candidates, the lower the corporation’s tax rates over time.
• Firms whose corporate PACs make contributions to the campaigns of tax policymakers and that also lobby on tax-specific issues benefit from the combination of the two efforts.

The research broke new ground in that their model takes into account the issue of timing, looking at contributions from PACs over earlier periods and corporate tax rates over later periods, Brown said. And because the research found that doing both contributions and lobbying brought greater benefits, it indicates that campaign contributions and lobbying serve different functions.

Transaction or relationship?

Plenty of prior research has been done by political scientists and management scholars, all looking at the interactions between politicians and corporations — a marketplace of supply and demand. Based on that work, Brown knew that corporations have two main choices when it comes to approaching policymakers. They might take a transactional approach — engaging sporadically, issue by issue, and having short-term exchanges with policymakers; or they might take a relational approach — building relations with policymakers consistently over time.

Although firms establish corporate PACs or spend money on lobbying because they believe such activities benefit them economically, prior studies seeking evidence of financial benefits have had mixed results. Observers also have questioned whether PACs have any impact, since required disclosures show corporations spend far more on lobbying than their PACs contribute to candidates.

Nevertheless, Brown notes, many corporations still sponsor their own PACs. “The interesting questions are, why do firms engage in the corporate political marketplace, how do they engage in the corporate political marketplace, what strategies do they adopt, are those strategies successful — those are the kind of things we’re interested in,” she said.

Corporate-sponsored PACs are funded with donations from individual managers, employees and shareholders, each of whom can donate up to $5,000 a year. PACs that have 50 or more contributors supporting five or more candidates can contribute up to $5,000 per candidate per election. (By contrast, super PACs, also known as “dark money,” are not required to report the sources of their funds.)

Effects on tax policy

With her background in tax, Brown knew that tax practitioners want to avoid surprises, reduce variability in tax rates and sustain corporations’ performance. She and her colleagues theorized that contributions by corporate PACs are like table stakes or entrance fees that buy access to policymakers, access that can give companies early information about changes in the content of legislation or gives them a receptive ear that could prevent unfavorable policies.

Brown’s team decided to look at PAC support in a tax-specific arena — the U.S. House and Senate tax-writing committees. Two key factors from the Federal Elections Commission data were the magnitude of PAC investments, as measured by the number of candidates on those committees who received contributions from corporate PACs during six-year periods, and the strength of PAC investments, as measured by the number of months the PACs maintained uninterrupted support of the candidates.

The data covered contributions made between 1994 and 2008. Because they also wanted to look at the much larger realm of corporate spending on lobbying, they used the Center for Responsive Politics data to estimate the amount of money corporations spent on tax-specific lobbying between 1998 and 2008. They then matched the companies named in both sets to the companies’ financial data drawn from Compustat for years between 2000 and 2012. That gave them a full sample consisting of 2,610 firms with corporate PACs, regardless of whether they lobbied on tax issues, and 13,890 observations of those firms in rolling periods from 1994 to 2012.

They also culled a “PAC participate” sample consisting of 440 firms that had PACs and had lobbied, and 2,492 observations of those firms over the same time frames. Now it was time to look for tax-specific outcomes. They focused on three that might be connected to a relational approach to corporate political activity: greater future tax benefits, less volatility in effective tax rates and whether PAC support is complementary to lobbying.

Relationships and results

Brown’s analysis supported the idea that firms are seeking to build relations with tax policymakers. They found that average PAC contributions to tax-writing members of Congress rose from $3,816 in 2003 to $8,846 in 2012. The average number of candidates receiving contributions rose from four in 2003 to six in 2012, and the average length of time the candidates received contributions rose from 74 months in 2003 to 120 months in 2012.

Committee chairs attracted high dollars, as did committee members with seniority and who were incumbents — indications of long-term relationships. The magnitude and strength of those relationships with corporate PACs showed up in lower future effective tax rates for the corporations. Firms whose PACs supported tax policymakers averaged a cash effective tax rate of 27.9 percent and a GAAP effective tax rate of 33 percent, compared to a 30.7 percent cash rate and 34.5 percent GAAP rate for firms whose PACs didn’t contribute to those policymakers.

Firms that supported more tax policymakers also realized lower future cash and GAAP effective tax rates. Supporting 5.25 more candidates meant a 1.66- to 1.69-percentage-point drop in effective tax rates. Firms that supported candidates for longer periods of time, indicating ongoing relationships, also saw lower future cash and GAAP effective tax rates. The research also found that firms that had relationships with more tax policymakers and firms that had longer relationships with them also saw less volatility in their future cash effective tax rates.

Firms involved in both PAC contributions to tax policymakers and tax-specific lobbying got additional benefits from the combination. Some surprises arose in the results, Brown said. They showed that despite the relatively small dollar amounts that corporate PACs contribute to candidates, the contributions still make a difference. The results also showed that “free riders” — corporations that don’t make PAC contributions to tax policymakers — don’t reap the same benefits as those that do.

The bottom line

Brown sees these takeaways from her research: For corporations, gaining and maintaining relationships with the right policymakers is a successful political strategy, resulting in lower and less volatile long-term effective tax rates. However, be aware of debates over transparency. If your strategy is revealed, are you comfortable that it provides the most benefit to all your stakeholders?

For policymakers, the number and breadth of candidates a corporation supports is a signal of how much it’s invested in the political marketplace and in a relational approach. Corporations investing nationwide are “really in the game,” Brown said. For investors, check the Center for Responsive Politics website — opensecrets.org — to see where the corporations you invest in are putting their money.

Ones following a long-term strategy likely invest in both Democrats and Republicans, in lawmakers from their home state and any state where they do business. Look for consistencies between PAC contributions and lobbying expenditures. And for the public, check your lawmakers to see what corporate PACs support them.

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First published in W. P. Carey Magazine, Spring 2015

Accounting Tax