The G.E. Loophole-- Bankrupting America To Make G.E. Executives Richer, Part II

Please go back one post and read Part I, where we began our look at the tax extenders (i.e., corporate loopholes) bill the Senate Finance Committee is getting ready to sneak through and present as a fait acompli, an incredible transpartisan exercise in Beltway corruption. The one sentence summary: corrupted senators from both parties are about to help General Electric continue to avoid paying taxes-- so that G.E. continues to help finance their own political careers-- by secreting away profits offshore to avoid paying federal taxes. The NY Times report in that post, by the way, won a Pulitzer Prize.

GE itself admits in its 2012 Annual Report (page 108) that this loophole is critical keeping the company’s taxes low. Because GE benefits so handsomely from what is technically known as the “Active Financing Exception,” it has been dubbed "the GE Loophole. "

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss and tax credit carryforwards, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.

Our businesses are subject to regulation under a wide variety of U.S. federal, state and foreign tax laws, regulations and policies. Changes to these laws or regulations may affect our tax liability, return on investments and business operations. For example, GE’s effective tax rate is reduced because active business income earned and indefinitely reinvested outside the United States is taxed at less than the U.S. rate. A significant portion of this reduction depends upon a provision of U.S. tax law that defers the imposition of U.S. tax on certain active financial services income until that income is repatriated to the United States as a dividend. This provision is consistent with international tax norms and permits U.S. financial services companies to compete more effectively with foreign banks and other foreign financial institutions in global markets. This provision, which had expired at the end of 2011, was reinstated in January 2013 retroactively for two years through the end of 2013. The provision had been scheduled to expire and had been extended by Congress on six previous occa- sions, but there can be no assurance that it will continue to be extended. In the event the provision is not extended after 2013, the current U.S. tax imposed on active financial services income earned outside the United States would increase, making it more difficult for U.S. financial services companies to compete in global markets. If this provision is not extended, we expect our effective tax rate to increase significantly after 2014.

And there isn't a single member of the Senate, at leafs not so far and not publicly, who has been willing to stand up and put his-- or her-- foot down and say no to G.E. Congress has rubber-stamped similar bills in the past so there a good chance that Congress will pass the "tax extender" package with the GE Loophole intact if the public doesn’t make some noise about it, even though it will cost the taxpayers between $450 and $700 billion. Just the G.E. rip-off by itself will cost $62 billion. You'll recall, no doubt, that Republicans recently refused to pass an extension of unemployment insurance benefits unless they were "paid for," and they’ve been willing to shut down the government and default on the national debt because of their supposed concern about the deficit. Meanwhile, Mitch McConnell said in a recent televised press conference that there is no need to pay for the tax extender package, even if it does add billions to the deficit.

Although she isn't a member of the Senate Finance Committee, Maine Republican Susan Collins has been a happy recipient of thousands of dollars in legalistic bribes from G.E. and other companies that are "excused" from paying taxes with lucrative loopholes. Collins, who has already taken a sweet $5,000 PAC check from G.E. this year for her reelection campaign, never seems to have considered recusing herself from voting on any of the loophole bills she always supports. This cycle, Collins is being opposed by a serious-minded tax reformer, Shenna Bellows, who doesn't take money from corporate PACs. Saturday was Shenna's birthday. I reached her by phone and asked her if she had a comment on the loopholes Collins thinks G.E. should get. Word-for-word:

Taxes. No matter how you feel about them, we can all agree that the tax code isn’t fair. It’s especially appalling that the largest corporations in this country are receiving massive tax subsidies-- getting billions back from the American taxpayers because of our byzantine tax code and the power of special interest lobbying. Some of America’s largest corporations are paying nothing in taxes. Meanwhile, small businesses that fuel our local economies pay more than their fair share. In Maine, small businesses provide almost 60% of the jobs in our economy. They pay up to 35% in taxes. In contrast, corporations like General Electric, which refuses to disclose its actual tax liability, are paying as little as 7% and in some cases zero. Now, Republicans in Congress are proposing to renew the so-called “tax extenders” also known as tax loopholes to the nation’s largest corporations, many of whom are already avoiding paying their fair share.

Across Maine, people tell me they’re really struggling right now. They feel like Washington isn’t listening. They feel like most Washington politicians are out of touch with local problems. Here in Maine, it’s almost mud season. The roads are in terrible shape because of lack of investment in infrastructure. At our state’s second largest university, students are protesting budget cuts and faculty lay-offs. Rather than addressing these challenges by investing in our local communities, Congress is proposing a tax giveaway we can’t afford. It’s fiscally irresponsible to subsidize the wealthiest corporations in this country at a cost of billions of dollars a year. It’s time to close the loopholes. It’s time for change in Washington.

It's well past the time for sending Susan Collins a petition or a letter. Her entire career has been one of conveniently following the crowd and rubber-stamping unconscionable loopholes for G.E. and the other corporate behemoths that have poued hundreds of dollars into her comfy career. The DSCC isn't even challenging her reelection this cycle. Blue America is determined to help Shenna Bellows get her message out, a message about what she is offering Mainers and a message that shows the contrast between her own vision and Collins' lack of vision. If you'd like to help, you can do so here.

The G.E. Loophole-- Bankrupting America To Make G.E. Executives Richer, Part I

On April 2, the Senate Finance Committee is planning to renew 55 major tax breaks worth $700 billion over 10 years, which is mostly to the benefit of the corporations like General Electic, Goldman Sachs and Citigroup, which underwrite the political careers of our political elite in general and the members of the Senate Finance Committee in particular. They will move the tax extender package, which guarantees that some of these mega-corporations and crooked Wall Street banks will continue to rake in billions of dollars in profits every year while paying a far lower tax rate than families and small businesses. $80 billion of the $700 comes from 2 major loopholes-- pardon the jargon: the Active Financing Exception and the CFC look-through rule, both of which were designed and maintained to assist corporations shift U.S. profits offshore to tax havens.

But, but, but… this isn't the House, controlled by corrupt corporate whores like Boehner, Ryan and Cantor. The Senate is controlled by the Democrats. This could never happen without the Democrats being on board. Precisely. Let's begin with the members of the Committee. The new chairman, replacing Big Buisness-owned Max Baucus, is Ron Wyden (D-OR) and the ranking member is Orrin Hatch (R-UT). There are 22 other members:

• Jay Rockefeller (D-WV)- $2,000
• Chuck Schumer (D-NY)- $2,000
• Debbie Stabenow (D-MI)- $27,750
• Maria Cantwell (D-WA)
• Bill Nelson (D-FL)- $4,000
• Bob Menendez (D-NJ)- $5,750
• Tom Carper (D-DE)- $17,800
• Ben Cardin (D-MD)- $14,000
• Sherrod Brown (D-OH)- $32,600
• Michael Bennet (D-CO)- $8,000
• Bob Casey (D-PA)- $9,000
• Mark Warner (D-VA)- $10,500
• Chuck Grassley (R-IA)- $4,000
• Mike Crapo (R-ID)
• Pat Roberts (R-KS)- $7,500
• Mike Enzi (R-WY)- $7,000
• John Cornyn (R-TX)- $15,000
• John Thune (R-SD)
• Richard Burr (R-NC)- $2,000
• Johnny Isakson (R-GA)- $3,000
• Rob Portman (R-OH)- $14,800
• Pat Toomey (R-PA)- $4,000

Partisanship and ideology aside, a bigger bunch of bribe-taking crooks won't be found anywhere in American government. The only member who could be counted to to consistently put the well-being of his consistence first is Sherrod Brown. General Electric has countless ways to funnel legalistic, thinly veiled bribes to senators. The numbers next to each member's name indicates direct payments by just one of the many General Electric PACs made during the 2012 cycle and so far this cycle. Why G.E.? These men and women are about to decide whether or "not" to extend the G.E. loophole that allows one of the most profitable corporations in history to pay no taxes. Time to go back to David Kocieniewski's classic NY Times investigative piece about GE's tax chicanery from March 24, 2010, G.E.'s Strategies Let It Avoid Taxes Altogether. Profits that year were $14.2 billion and their U.S. tax bill was zero; in fact, G.E. claimed a $3.2 billion tax benefit!

That may be hard to fathom for the millions of American business owners and households now preparing their own returns, but low taxes are nothing new for G.E. The company has been cutting the percentage of its American profits paid to the Internal Revenue Service for years, resulting in a far lower rate than at most multinational companies.

Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.

…A review of company filings and Congressional records shows that one of the most striking advantages of General Electric is its ability to lobby for, win and take advantage of tax breaks.

Over the last decade, G.E. has spent tens of millions of dollars to push for changes in tax law, from more generous depreciation schedules on jet engines to “green energy” credits for its wind turbines. But the most lucrative of these measures allows G.E. to operate a vast leasing and lending business abroad with profits that face little foreign taxes and no American taxes as long as the money remains overseas.

Company officials say that these measures are necessary for G.E. to compete against global rivals and that they are acting as responsible citizens. “G.E. is committed to acting with integrity in relation to our tax obligations,” said Anne Eisele, a spokeswoman. “We are committed to complying with tax rules and paying all legally obliged taxes. At the same time, we have a responsibility to our shareholders to legally minimize our costs.”

The assortment of tax breaks G.E. has won in Washington has provided a significant short-term gain for the company’s executives and shareholders. While the financial crisis led G.E. to post a loss in the United States in 2009, regulatory filings show that in the last five years, G.E. has accumulated $26 billion in American profits, and received a net tax benefit from the I.R.S. of $4.1 billion.

But critics say the use of so many shelters amounts to corporate welfare, allowing G.E. not just to avoid taxes on profitable overseas lending but also to amass tax credits and write-offs that can be used to reduce taxes on billions of dollars of profit from domestic manufacturing. They say that the assertive tax avoidance of multinationals like G.E. not only shortchanges the Treasury, but also harms the economy by discouraging investment and hiring in the United States.

“In a rational system, a corporation’s tax department would be there to make sure a company complied with the law,” said Len Burman, a former Treasury official who now is a scholar at the nonpartisan Tax Policy Center. “But in our system, there are corporations that view their tax departments as a profit center, and the effects on public policy can be negative.”

The shelters are so crucial to G.E.’s bottom line that when Congress threatened to let the most lucrative one expire in 2008, the company came out in full force. G.E. officials worked with dozens of financial companies to send letters to Congress and hired a bevy of outside lobbyists.

The head of its tax team, Mr. Samuels, met with Representative Charles B. Rangel, then chairman of the Ways and Means Committee, which would decide the fate of the tax break. As he sat with the committee’s staff members outside Mr. Rangel’s office, Mr. Samuels dropped to his knee and pretended to beg for the provision to be extended-- a flourish made in jest, he said through a spokeswoman.

That day, Mr. Rangel reversed his opposition to the tax break, according to other Democrats on the committee.

The following month, Mr. Rangel and Mr. Immelt stood together at St. Nicholas Park in Harlem as G.E. announced that its foundation had awarded $30 million to New York City schools, including $11 million to benefit various schools in Mr. Rangel’s district. Joel I. Klein, then the schools chancellor, and Mayor Michael R. Bloomberg, who presided, said it was the largest gift ever to the city’s schools.

…As it has evolved, the company has used, and in some cases pioneered, aggressive strategies to lower its tax bill. In the mid-1980s, President Ronald Reagan overhauled the tax system after learning that G.E.-- a company for which he had once worked as a commercial pitchman-- was among dozens of corporations that had used accounting gamesmanship to avoid paying any taxes.

“I didn’t realize things had gotten that far out of line,” Mr. Reagan told the Treasury secretary, Donald T. Regan, according to Mr. Regan’s 1988 memoir. The president supported a change that closed loopholes and required G.E. to pay a far higher effective rate, up to 32.5 percent.

That pendulum began to swing back in the late 1990s. G.E. and other financial services firms won a change in tax law that would allow multinationals to avoid taxes on some kinds of banking and insurance income. The change meant that if G.E. financed the sale of a jet engine or generator in Ireland, for example, the company would no longer have to pay American tax on the interest income as long as the profits remained offshore.

Known as active financing, the tax break proved to be beneficial for investment banks, brokerage firms, auto and farm equipment companies, and lenders like GE Capital. This tax break allowed G.E. to avoid taxes on lending income from abroad, and permitted the company to amass tax credits, write-offs and depreciation. Those benefits are then used to offset taxes on its American manufacturing profits.

G.E. subsequently ramped up its lending business.

As the company expanded abroad, the portion of its profits booked in low-tax countries such as Ireland and Singapore grew far faster. From 1996 through 1998, its profits and revenue in the United States were in sync-- 73 percent of the company’s total. Over the last three years, though, 46 percent of the company’s revenue was in the United States, but just 18 percent of its profits.

Martin A. Sullivan, a tax economist for the trade publication Tax Analysts, said that booking such a large percentage of its profits in low-tax countries has “allowed G.E. to bring its U.S. effective tax rate to rock-bottom levels.”

…Minimizing taxes is so important at G.E. that Mr. Samuels has placed tax strategists in decision-making positions in many major manufacturing facilities and businesses around the globe. Mr. Samuels, a graduate of Vanderbilt University and the University of Chicago Law School, declined to be interviewed for this article. Company officials acknowledged that the tax department had expanded since he joined the company in 1988, and said it now had 975 employees.

At a tax symposium in 2007, a G.E. tax official said the department’s “mission statement” consisted of 19 rules and urged employees to divide their time evenly between ensuring compliance with the law and “looking to exploit opportunities to reduce tax.”

Transforming the most creative strategies of the tax team into law is another extensive operation. G.E. spends heavily on lobbying: more than $200 million over the last decade, according to the Center for Responsive Politics. Records filed with election officials show a significant portion of that money was devoted to tax legislation. G.E. has even turned setbacks into successes with Congressional help. After the World Trade Organization forced the United States to halt $5 billion a year in export subsidies to G.E. and other manufacturers, the company’s lawyers and lobbyists became deeply involved in rewriting a portion of the corporate tax code, according to news reports after the 2002 decision and a Congressional staff member.

By the time the measure-- the American Jobs Creation Act-- was signed into law by President George W. Bush in 2004, it contained more than $13 billion a year in tax breaks for corporations, many very beneficial to G.E. One provision allowed companies to defer taxes on overseas profits from leasing planes to airlines. It was so generous — and so tailored to G.E. and a handful of other companies-- that staff members on the House Ways and Means Committee publicly complained that G.E. would reap “an overwhelming percentage” of the estimated $100 million in annual tax savings.

According to its 2007 regulatory filing, the company saved more than $1 billion in American taxes because of that law in the three years after it was enacted.

By 2008, however, concern over the growing cost of overseas tax loopholes put G.E. and other corporations on the defensive. With Democrats in control of both houses of Congress, momentum was building to let the active financing exception expire. Mr. Rangel of the Ways and Means Committee indicated that he favored letting it end and directing the new revenue-- an estimated $4 billion a year-- to other priorities.

G.E. pushed back. In addition to the $18 million allocated to its in-house lobbying department, the company spent more than $3 million in 2008 on lobbying firms assigned to the task.

Mr. Rangel dropped his opposition to the tax break. Representative Joseph Crowley, Democrat of New York [one of the most blatantly corrupt Members of Congress in history], said he had helped sway Mr. Rangel by arguing that the tax break would help Citigroup, a major employer in Mr. Crowley’s district.

…While G.E.’s declining tax rates have bolstered profits and helped the company continue paying dividends to shareholders during the economic downturn, some tax experts question what taxpayers are getting in return. Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment. In that time, G.E.’s accumulated offshore profits have risen to $92 billion from $15 billion.

“That G.E. can almost set its own tax rate shows how very much we need reform,” said Representative Lloyd Doggett, Democrat of Texas, who has proposed closing many corporate tax shelters. “Our tax system should encourage job creation and investment in America and end these tax incentives for exporting jobs and dodging responsibility for the cost of securing our country.”

As the Obama administration and leaders in Congress consider proposals to revamp the corporate tax code, G.E. is well prepared to defend its interests. The company spent $4.1 million on outside lobbyists last year, including four boutique firms that specialize in tax policy.

We'll dig a littler deeper in Part II, which will be the next post up.