How companies engage in monitoring and molding policy

Associate Professor of Accountancy Jenny Brown and her co-authors provide a four-decade review of which, what, and how firms are engaging in tax-related corporate political activity.

With never-ending election coverage and the barrage of news about policy and campaign promises, Americans are more interested than ever in all types of political activity. One type that’s garnering more and more interest is corporate political activity (CPA). CPA is a term for all of a firm’s actions or strategies in the political sphere, including shaping policymaking and regulation through lobbying their legislators and contributing to political candidates, also known as PAC giving. Academic researchers and the public have long shared an interest in whether and how CPA relates specifically to taxes and tax policy.

Associate Professor of Accountancy Jenny Brown is one of those academics. A former PhD student, Lauren Wellman, sparked her interest in CPA, which led her to research activity with Wellman, then with University of Arizona Professor Katherine Drake, and most recently with John Barrick, a professor at Brigham Young University in Utah, with whom she co-authored “Tax-Related Corporate Activity Research: A Literature Review.”

Brown and Barrick conducted a comprehensive review of tax-related CPA studies from the past four decades, looking for broad themes. The researchers framed their discussion around three main questions:

1. Which firms are likely to engage in tax-related CPA?
2. What do firms expect to gain from participating in politics?
3. How do firms achieve their political goals?

Who has a hand in tax-related CPA?

The “who” is one of the easier questions to answer — sort of. The easy answer is that all corporations engage in the political process in some way, and all companies pay taxes. “Of course, corporations engage in CPA in general,” Brown says, “because they’re interested in things like environmental and labor regulations. And because all companies pay taxes, you’d expect all companies to be engaged in tax-related CPA to some extent.”

However, some smaller companies may be able to “free ride” and not spend any of their dollars on CPA.

“If you don’t spend up to a certain threshold, you don’t get anything for your money,” Brown explains. Most legislative or regulatory benefits hit an entire industry or all firms that share a certain kind of activity, like research and development. “Because most benefits are broad like that, the smaller firms don’t have to pony up,” she says. “They know the bigger firms will do the heavy lifting.” She offers this example: Suppose there’s a proposed credit to homebuyers for energy-efficient appliances. Smaller manufacturers don’t need to lobby for the legislation to pass because companies like GE and Whirlpool can afford to carry the lobbying load. But, in the end, appliances from all size companies will get the subsidy and likely boost their sales.

With the transparency afforded by Open Secrets (opensecrets.org), anyone can see who companies support with PAC dollars, how much they spend relative to others in the industry.

What you can’t see is exactly how those numbers break down. For example, if a company is spending $10,000 on CPA in the categories of tax, environmental issues, and defense, you don’t know how those dollars are divided among the three.

Is engagement meeting expectations?

The “what” that companies expect to gain can vary widely. “The what part isn’t always lower taxes; sometimes companies just want certainty,” Brown explains. “They have to be engaged in the process because they need an ear to the ground to know what’s coming down the pipeline so they can plan accordingly.”

For example, green energy companies may be looking to the government to see what their direction will be on green energy initiatives.

Another motivation for CPA is to come across as a good corporate citizen. A large corporation like Amazon, for example, may get heat for trying to minimize their tax liability through CPA. But, as Brown explains, from Amazon’s point of view, there is some political cost to being perceived as a poor corporate citizen. “They want to avoid that perception because if they incur too much political scrutiny, they may face additional regulations, either in the form of higher taxes or in the form of some other regulatory reaction that would be unfavorable to them. We call that the political cost hypothesis.”

One sub-stream of literature Brown and Barrick pursued is that of corporate social responsibility, which can include actions like good labor practices and good environmental practices. They posited whether paying your fair share of taxes is a complement or a substitute for corporate social responsibility. “Do firms that have good corporate social responsibility just have a certain culture that also makes them pay more in taxes or are these two things viewed more as a trade-off? For example, firms that are a little more aggressive with their taxes, to avoid reputation costs, may bump up their corporate social responsibility spending.”

What’s the ROI of CPA?

So, corporations can donate to candidates, hire lobbyists, shake hands, and advocate for themselves, but how do they know if the efforts are worth it — particularly when it comes to tax-related CPA.

Both academics and managers probably have some of the same questions: How do we evaluate the effectiveness of our corporate political strategy? We know we’re spending. What are we getting for what we’re spending? It’s not an easy thing to evaluate.”

Firms can typically measure the dollar benefit of getting a new bill passed. But If they’re trying to maintain current legislation because it’s good for their company or industry or they’re simply trying to manage uncertainty, the return they get is much harder to measure.

CPA is also a rather long-term investment. Corporations don’t give to a candidate expecting to get something tomorrow, Brown says. “They give to both Democrats and Republicans consistently over time to build relationships, so that when they do need something they have someone to call. They don’t care which side of the aisle you’re on. They care about who’s in power at the time.”

How do firms participate in CPA?

Although CPA primarily includes lobbying and PAC giving at the state and federal level, there are lesser activities that are also a part of CPA, such as being part of a trade association that supports a think tank that puts out white papers, testifying before Congress about legislation, or even starting a grassroots campaign among employees or customers to shape the way policymakers think about an issue.

Unfortunately, hiring high-powered lobbyists and coughing up cash for campaign contributions can have negative connotations for corporations. Citizens may wonder if firms are simply paying to get their way?

Brown says the evidence that CPA is a quid pro quo gain is mixed. She says that anecdotal evidence suggests that in an uncertain environment, much of that activity could simply be information gathering. “If you don’t know what the landscape looks like, it’s hard to plan how many widgets you should make this year,” she says. With the recent tariff policy from the executive branch, for example, firms could be spending on CPA heavily to lobby reps in Washington, D.C., just to be sure they have a good idea of what the policy will be so they can react quickly and change things. “If you think about it that way,” Brown notes, “it’s not as pernicious — it’s just an investment in understanding the landscape.”