A jobs act that created no jobs: a lesson in profitable lobbying

You’re a coalition of multinational corporations. Imagine this deal: Invest $1 in lobbying. Get a return on investment of $220. Save $100 billion on taxes, too. Nice, eh?

That’s the conclusion of three University of Kansas professors who undertook an empirical analysis of the American Jobs Creation Act of 2004 to study rates of return for money spent on lobbying, reported The Washington Post in an April 12 story by Dan Eggen.

This law — this shady excuse for a law with a name only charlatans could love — allowed companies that had earned profits overseas to inexpensively bring that money back into the States. The customary tax rate on such profits was 35 percent. But this elegantly named process — repatriation of profits — gave companies a one-time chance four years ago to haul the money home, paying only 5.25 percent.

The act was a tax holiday sought by a coalition of companies, primarily big pharmaceutical and high-technology corporations, all because they sought to pay little or no taxes on profits generated overseas — and they concocted a successful scheme to pull it off.

Mr. Eggen summarized the Kansas professors’ study:

The largest recipients of tax breaks were concentrated in the pharmaceutical and technology fields, including Pfizer, Merck, Hewlett Packard, Johnson & Johnson and IBM. Pfizer alone repatriated $37 billion, representing 70 percent of its revenue in 2004, the study found. The now-beleaguered financial industry also benefited from the provision, including Citigroup, J.P. Morgan Chase, Morgan Stanley and Merrill Lynch, all of which have since received tens of billions of dollars in federal bailout money. [emphasis added]

Critics argued that the act would benefit multinational corporations to the detriment of domestic firms, reported Jonathan Weisman of the Post in August 2005. Even the Bush White House was dubious over the alleged economic benefits of the bill:

“There will be some stimulative effect because it pumps money into the economy,” said Phillip L. Swagel, a former chief of staff on President Bush’s Council of Economic Advisers, which had opposed the tax holiday. “But you might as well have taken a helicopter over 90210 [Beverly Hills] and pushed the money out the door. That would have stimulated the economy as well.”

In 2006, Washington Post business columnist Allan Sloan wrote of Ford Motor Co.’s abuse of the misnamed act:

It’s almost enough to make you laugh — bitterly, of course. Here was Ford Motor Co. announcing yesterday that it had cut 10,000 jobs last year and that it will cut up to 30,000 more. But shedding jobs at muscle-car acceleration rates didn’t stop Ford from pocketing hundreds of millions of dollars courtesy of the American Jobs Creation Act. … Hello? How can you simultaneously cut jobs and benefit from the American Jobs Creation Act? Welcome to the wonderful world of Washington nomenclature. [emphasis added]

Mr. Sloan estimated that Ford saved $850 million in taxes, not the $250 million the company suggested in its press release.

So how did corporations that don’t believe in paying their appropriate share of taxes finagle this?

Here’s one story, as reported by Mr. Eggen:

The provision was championed in part by the Homeland Investment Coalition, a group of companies and trade associations that was formed to push for the repatriation holiday. The Pharmaceutical Research and Manufacturers of America (PhRMA), one of the disbanded coalition’s members, said in a statement Friday that “repatriation of profits provided a new source of investment for American companies.”

“PhRMA supported the legislation four years ago as part of a broad business coalition because of the additional economic benefits the bill would provide,” senior vice president Ken Johnson said. “It meant jobs and skilled training for American workers, as well as a shot in the arm for local economies.” [emphasis added]

This coalition of multinationals had worked on getting its profits home earlier— and falsely articulated its intent regarding jobs. In 2003, seeking support for the then-named Invest in the U.S.A. Act of 2003, the coalition sent a letter to Sen. Chuck Grassley, chair of the Senate Finance Committee, and Sen. Max Baucus, ranking member. The letter said that “The $135 billion currently offshore that would be invested in America would benefit the U.S. economy by increasing domestic investment in plant, equipment, R&D and job creation” among other benefits, including investments in emerging technologies, funding for pension plans hurt by stock market declines, and, especially:

“[i]mproving the long term financial strength of U.S.-based companies by reducing domestic debt loads, strengthening corporate balance sheets, and lowering corporate bond rates; increasing dividends to shareholders (which can be productively redeployed); and raising equity market valuations by increasing funds available for share repurchases.”

Parse it any way you wish — creating jobs was the intended political cover for any member of Congress to sign on as a co-sponsor of the legislation.

But did the American Jobs Creation Act of 2004 actually lead to a net gain in jobs? Nope. Did it provide “a new source of investment for American companies”? Not even close. And supporters of this tax holiday tried to get another such tax break. Reported Mr. Eggen:

… the Congressional Research Service and others have since found that many companies cut jobs in the wake of the tax break and that nearly all the money was used for stock buybacks or dividends. Supporters failed in a bid to include a similar tax break in this year’s stimulus legislation, and a Senate subcommittee has launched an investigation into how companies used their tax savings under the 2004 program. [emphasis added]

Any congressional investigation lags reporting by The New York Times by four years. An August 2005 Times editorial said:

A month ago, Hewlett-Packard announced it would lay off 14,500 workers by November 2006. Meanwhile, the company is about to repatriate $14.5 billion in profits it has in overseas accounts at a measly tax of 5.25 percent — an 85 percent discount off the normal corporate rate. The cut-rate repatriation, offered by Congress to American companies that bring profits held in foreign lands home in 2005, was sold to the public as a one-shot deal to generate cash for new hiring. But as its critics warned, the tax cut is functioning instead as a handout for America’s most profitable companies.

Hewlett is just one example. Normally, the tax on a $14.5 billion repatriation would be about $5 billion. Because of the bargain rate in 2005, Hewlett expects to pay roughly $800 million. Hewlett also expects its layoffs to cost the company about $1 billion. Thus, in Hewlett’s case, the tax holiday has not only failed to create jobs, but has also more than covered the cost of cutting workers from the payroll.

Dozens of other companies are also bringing billions home with no mention of new hiring. [emphasis added]

Drug companies especially needed to bring the overseas profits home — but not, as the act’s name suggests, to create jobs. They had big financial problems looming. Patents on brand-name drugs worth billions in sales were about to expire, leading to competition by companies producing generic versions.

Upcoming patent expirations for [Pfizer] include Lipitor in 2011, ‘the little blue pill’ Viagra in 2012, and the allergy medicine Zyrtec in 2012 as well. The loss of these patents would see Pfizer losing more than $14 billion in revenue. [emphasis added]

During the last six months of 2004, as the bill was manuevered successfully through Congress, the stock prices of drug companies were falling, in part because of scandals over the safety of drugs that had long been approved by the FDA. For example, government regulators said Merck & Co.’s arthritis drug Vioxx may have led to more than 27,000 heart attacks and sudden cardiac deaths before it was pulled from the market in October 2004.That happened just two weeks before the American Jobs Creation Act was signed into law by President Bush. Merck badly needed its overseas profits, if only to deal with what might be a litigation bill of $10 billion to $15 billion.

Merck, like other companies, also had developed what Motley Fool columnist Robert Steyer in February called

a version of Pfizer’s “Lipitor disease” — a best-selling drug with limited remaining patent life accounting for a huge percentage of revenue:
• Merck lost protection on Fosamax early last year.
• Merck is seeing protection disappear by 2012 on the two drugs that made up 40 percent of revenue through the first nine months of 2008 — Cozaar/Hyzaar and Singulair.
• Bristol-Myers’ Plavix, creating 27 percent of 2008 revenue, gets chopped in 2011.
• Lilly’s Zyprexa, bringing in 23 percent of last year’s revenue, is also done for in 2011.

Big Pharma knew long before 2004 it needed to get every last dollar of overseas profits back into the States — at the lowest tax rate possible. It had to shore up declining revenues and dividends to stockholders — and to fuel big mergers, which it saw as the best cure for Lipitor disease.

But job creation? Merely a fig leaf for public consumption to make this tax holiday palatable to politicians. Jobs were lost, not created.

By August 2007, as the AP graphic shows, pharmaceutical companies had announced thousands of jobs cuts just two years after the repatriation of overseas profits.

Four years ago, Mr. Weisman of the Post reported others were lining up at the tax-break trough:

Procter & Gamble Co. intends to bring home $10.7 billion, and Johnson & Johnson Inc. has an $11 billion plan. Schering-Plough Corp. could bring back $9 billion. This week, Hewlett-Packard Co. announced it will repatriate $14.5 billion in the second half of the year, mainly for “strategic acquisitions,” said Ryan Donovan, an HP spokesman.

Strategic acquisitions made possible by a jobs creation act? More than 800 companies took advantage of the tax break.

Here’s another way to examine passage of the 2004 act. Cui bono politically?

Apparently, the congressional sponsor and 40 co-sponsors did. Let’s look at how just one member of the coalition — the pharmaceutical industry — sought to influence members of Congress through donations to their campaigns.

The Ways and Means Committee, by constitutional fiat, is the chief tax-writing committee of the House of Representatives. The 2004 bill was primarily a creation of the House.

Former congressman Bill Thomas (R-Calif) served as chairman of the House Ways and Means Committee during the run-up to the bill’s passage. He’s listed as the prime House sponsor of the American Jobs Creation Act. During his congressional career, the pharmaceutical industry gave his campaign more than $407,000.

The bill had 40 sponsors. All but one were Republicans. A review of the campaign contributions records of these 40 men and women aggregated by the Center for Responsive Politics showed that since 1998, the pharmaceutical industry has given their campaign committees $4.49 million. Of those 40 co-sponsors, 14 served on the Ways and Means Committee: They have received, since 1998, $2.5 million from Big Pharma.

Recall that, thanks to the act’s tax break, Pfizer repatriated $37 billion.

Former Rep. Nancy L. Johnson, Democrat of Connecticut (where drug-maker Pfizer has a significant research and development presence), received more than $692,000 from Big Pharma between 1998 and her departure from office. She is now a senior public policy adviser (er, lobbyist) for Baker, Donelson, Bearman, Caldwell & Berkowitz and serves on the Pfizer U.S. Health Advisory Board.

The bill had no serious opposition in Congress. The Senate voted 69-17 on the bill; The House, 207-16. Their acquiesance allowed an average rate of return of 22,000 percent for the corporations who lobbied for this bill, say the Kansas professors.

If $1 invested in lobbying earns a $220 return, as the Kansas study suggests, then the pharmaceutical industry has invested, for the 41 sponsors and co-sponsors of the American Jobs Creation Act of 2004, about $4.5 million. That’s a return of $990 million. That’s pretty good ROI for buying only 7 percent of the members of Congress.

13 replies »

  1. I love it when corporations have their pr people complain about the taxes they pay when things like this are happening.

  2. Maybe I missed it in this too-long post, but I didn’t see any discussion of whether the companies in question had already paid taxes on these profits to the foreign nations in which the profits were previously sequestered.

    If so, then taxing them at 30+% for bringing it back would amount to double-taxation, and instead of the profits being used here in the U.S., it forces their caretakers to put them to work overseas, stimulating other countries’ economies. That’s hardly stimulative for our country in any case.

    But let’s not let that get in the way of a good populist story.

  3. Nor logic get in the way of refutation of researched conclusions. First, what these companies have paid to other nations in taxes is irrelevant to this story because the question is: What do these companies owe the United States government? Second, it is highly doubtful that these same companies who are “repatriating” their profits in the U.S. would continue to do business in nations where the total taxes paid cut too deeply into their profits since that was the reason they located overseas. Third, the Internal Revenue Code offers tax breaks for a number of overseas investments. However, those breaks do not include lobbying money or bribes paid to foreign governments. I did not see any mention in the critique of Dr. Denny’s post of whether or not the 30% rate reported by the companies included the official and under-the-table bribes associated with doing business overseas. Fourth, I fail to see the benefit in rewarding those who utilize lobbying our government officials for tax evasion. Finally, I believe I need an definition of the word, “investment” that I read frequently in connection with the pro-business groups because investment is supposed to stimulate the economy but without consumers to spend money, the only investment to which I can reasonably conclude this words refers is, “dividends.”

  4. Looks like the WTO and EU caused some adjustment to be made and the lobbyists took the opportunity to pick up some benefits for their clients. It seems to me the story is not whether the policy is good or bad ( I think it’s bad ) but the fact that the Congress is pretty much bought and sold by corporate interests. You’d have to be living under a rock these days to not see that this is a bad idea.

    Click to access 2004-jobs-creation-act.pdf