The R&D tax credit, which many experts consider critical for America’s economic success, has never been made permanent. Instead, it has been renewed again and again since 1981. And there are more and more such highly specialized tax credits (some beneficial to the overall economy, some not so much) that are similarly renewed. In 1998 there were forty-two such “tax extenders.” By 2011 that number had grown to 154.27
Why doesn’t Congress just make these tax deductions permanent? Why go through the process of renewing them year after year?
If you are sincere in asking those questions, you are not thinking like the Permanent Political Class. Making them permanent would take away the ability of the Permanent Political Class to return again and again to wealthy industries for the largesse to keep the credits on the books. “They trot out the R&D tax credit every few years, and it’s always with their hands open, looking for money,” says Herbold. “It’s like an annuity for them. They won’t make it permanent because it doesn’t make sense for them to make it permanent.”
Dealing with blackmail in the criminal world is never easy. The problem with blackmailers is that once you pay them money, they might come back again and again asking for more. At some point, you just have to stop paying the blackmailer. You run out of either money or patience. But Washington has been using tax extenders to extort donations for more than thirty years.
Lobbyists have likened the tax extenders ploy to Lucy pulling the football away from poor Charlie Brown in the last second.
In the House of Representatives, much of the work on tax extenders is done by the powerful House Ways and Means Committee and its current chairman, Congressman Dave Camp of Michigan. In the Senate, tax extenders are under the control of the powerful Senate Finance Committee, under the chairmanship of Senator Max Baucus of Montana.
December 2011 was unusually warm in Washington. Perhaps that stemmed in part from the enormous heat being generated on Capitol Hill over the federal budget and tax policy. President Obama and Senate Democrats were locked in a battle with congressional Republicans about the tax code and the federal budget. And tax extenders were at the heart of the battle.
It had become standard practice for more than a decade: create regular uncertainty for companies large and small over whether certain tax credits would be renewed. Five times over the past ten years it had been necessary to act on extenders retroactively.28
In December 2011, dozens of important tax extenders were set to expire at the end of the month. One was the R&D tax credit. Another was a special fifteen-year depreciation for construction improvements by restaurant leaseholders. There was also section 179 expensing, which encourages small businesses to invest in new equipment by expensing much of the cost up front instead of over time. In 2012 this provision allowed businesses to deduct up to $139,000 for the cost of new equipment. If not renewed, the deduction would drop to only $25,000.29
Many companies had a lot to lose and were panicked. These tax extenders affected such industries as real estate, housing, energy, and automobiles. “I’m working on several tax extenders, and we’re working our butts off,” said lobbyist Rich Gold.30
So, of course, those in a position to extract a toll did. Senator Max Baucus, as the chairman of the Senate Finance Committee, generally did not attract many contributions from the energy industry. (Those firms spent more money on members of the Energy Committee.) But several of the tax deductions scheduled to expire would have a huge effect on energy companies, especially smaller independent producers who lacked the capital of the global multinationals. On December 14, 2011, the Senate Finance Committee held hearings on complex tax issues related to energy and changes that the White House had proposed making it more difficult for fossil fuel and natural gas producers to log drilling expenses. If these tax extenders expired, it would cost the independent energy industry $3.5 billion in new taxes.31 According to Baucus’s campaign finance records, he had not received a check from the energy industry since May 2011, more than six months earlier. But with the future of energy industry tax extenders in doubt, dozens of small companies from Kansas, Oklahoma, Texas, and Illinois wrote checks totaling $46,100.32 In December, Baucus pocketed checks from the Domestic Energy Producers Alliance and $5,000 from the National Stripper Well Association and $2,000 from the American Independent Energy PAC. On December 21 alone, nineteen checks from independent energy companies were deposited by his campaign, totaling $28,000.33 These were smaller companies like Cobra Oil and Gas in Wichita Falls, Texas, and Vess Oil in Wichita, Kansas. Why did all these smaller companies write checks during the same time period (most of them on the same day) and after so long a period of not donating to Baucus’s campaign? Did they organize themselves to coordinate their donations, or were they solicited by Baucus’s office to ensure the tax extenders would go through? We have no way of knowing.
Money also flowed to Baucus’s leadership PAC. His former political adviser Shannon Finley was now a lobbyist registered to work for the American Petroleum Institute. She sent a $5,000 check in December.34
During the 112th Congress, a senator needed to raise an average of $10,476,451 and a representative $1,689,580 to clinch the coming election.35 But for those who sit on a powerful committee like the House Ways and Means Committee, raising money is not difficult. These committee assignments bring greater opportunities for leverage, which encourages—perhaps even compels—people to make donations. Analysis of contribution data from the 103rd Congress shows that a member of the Ways and Means Committee raises on average a quarter of a million dollars more than colleagues on other committees.36 Tax extenders are a big reason.
The chairman of that powerful committee in December 2011, Dave Camp, has represented a rural district north of Lansing, Michigan, on the Lower Peninsula since 1991. Camp regularly wins reelection with approximately two-thirds of the vote. Generally low-key, he told the Wall Street Journal, “I don’t think you need to bang the gavel, pound your fists or shout to be effective.”37 Yet even with a safe seat, he works to raise funds, not a difficult task given his power over tax policy. In 2012 he raised almost $4.4 million to keep his seat safe.38 Much of it comes from milking those looking to extend tax credits or deductions.
In December 2011, Camp kept it open whether tax extenders would be, well, extended. More than sixty tax extenders were set to expire within weeks.39 Meanwhile, his fund-raisers took in a massive number of checks from those who were jostling most over the extenders—corporate PACs and lobbyists. Camp received PAC checks from the Redding Rancheria Indian Tribe in California (concerned about expiring tax credits for companies establishing businesses on Indian reservations) as well as the Association of Home Appliance Manufacturers, Blue Cross, the Real Estate Roundtable, and others. In all, in December 2011 he collected twenty-four checks from corporate PACs, fifteen checks from lobbyists, and only seven from individuals.40
And he was only getting started. Congress recessed for Christmas, and Camp went home to Michigan for the holiday. When Congress returned to Washington in January, the tax extenders were still in limbo. It was a catastrophe for certain companies and industries—but a boom time in Washington. Extraction of money was intensifying. Camp and his committee outlined their plans to have lengthy discussions on which extenders should stay and which should go. They were scheduled to be held on April 26, 2012, by the House Subcommittee on Select Revenue Measures. The subcommittee planned to look at seventy-five tax extenders that had expired or were expected to expire, everything from deductions for oil and natural gas and alternative fuels deductions to special tax breaks for TV and movie producers, railroads, mining companies, rum, and investment companies.41 It was what a fighter pilot might call a “target-rich environment” for exploitation.
In announcing the hearings, subcommittee chairman Pat Tiberi of Ohio declared, “As Chairman Camp and I stated last month, the Ways and Means Committee is engaged in a process to review dozens of tax provisions that either expired last year or expire this year. This heari
ng provides a formal opportunity for the Subcommittee to hear from our House colleagues about the merits of extending—or not extending—many of these tax policies.” It was a chance for members of Congress to make a pitch for the tax extenders they had introduced in legislation in Congress.42 And of course, it meant the tollbooth was still open for a few more months.
In Connecticut, ten nervous senior executives at General Electric made donations to Camp on March 19 totaling $16,000. Those executives included the chief operating officer, chief financial officer, and vice chairman of the company.43 General Electric had an enormous amount of money at stake in the tax extenders drama. They had become masters of sorts over the years in turning profits but largely avoiding taxes, thanks to a favorable and complicated tax code.
But Camp’s most lucrative play was targeting corporate PACs. From the beginning of March to the date of the hearings to vet which extenders might stay and which might go, he collected 120 checks totaling over $230,000 from corporate or trade association PACs, the vast majority of which had money at stake in the tax extender debate. The money came from the National Federation of Independent Business, the National Association of Home Builders, Walmart, General Motors, General Electric, Associated Builders and Contractors, Johnson & Johnson, and more.44
Pat Tiberi, who was in charge of those subcommittee hearings, was milking hard too, and his bucket almost overflowed. In the six weeks between the announcement of the hearings and the end of April when they were held, Tiberi collected 128 checks totaling over $210,000 from PACs, including hospitals, the Teamsters Union, Comcast, the American Meat Institute, and McDonald’s—in other words, virtually anyone anxious about the fate of those tax extenders.45
Tax extenders cause chaos for companies that constantly need to decide whether certain tax deductions will still be available to them the following year. But for the Permanent Political Class, tax extenders function perfectly.
Congressman Bill Young grew up outside of Pittsburgh in a small coal town. He spent his early years in a shotgun shack before his family moved to Florida. First elected to Congress in 1971, he comes across as courtly and genial. But he can be tough as steel. In a 1999 New York Times interview, Young said, “In my life I’ve been shot, I’ve been hit by a truck, survived an airplane crash, I’ve had my chest opened and my heart rebuilt. And it’s sort of hard to get me flustered after all that.”46
Bill Young is the chairman of a very powerful and important subcommittee, the House Appropriations Committee’s Subcommittee on Defense. Members of Congress who sit on the appropriations committees have extraordinary power. Those who are subcommittee chairmen, like Young, are sometimes called “Cardinals” because they wield so much power. Politicians love committees like Appropriations. As then-Congressman Ray LaHood indelicately told the Peoria Journal Star, “The reason I went on the Appropriations Committee, the reason other people go on the Appropriations Committee, is they know that it puts them in a position to know where the money is at, to know the people who are doling the money out, and to be in the room when the money is being doled out.”47
All defense spending essentially goes through Young’s subcommittee. In the early months of 2012, Young’s subcommittee was piecing together its report on defense spending for fiscal year 2013. The pie they were preparing to cut up and divide among programs and contracts: how to spend approximately $519 billion in non-war-related defense spending. The committee would essentially establish the foundation for where defense dollars would be spent.48
This is the sort of document that can make or break the programs of defense contractors, both large and small. Writing checks when asked during these critical early months can be particularly important. The document was set to be released on May 7 by Young’s subcommittee.49 So, as the document was being hammered together, Young’s fund-raisers went to work (as can be seen by his campaign’s hefty dinner tabs for the time period).50 On March 30, Young collected thirty-seven checks totaling over $30,000, mostly from defense contractors, employees of defense contractors, and lobbyists who worked for defense contractors.51 During the two weeks preceding that date, he had already collected another fifty-two checks totaling over $58,000 from a similar group.52 For Young, the tollbooth is an important component in the extraction of contributions. In those first three months of 2012, he collected $181,452 in donations.53 In the final nine months of the year, he collected only $72,850.54
But paying a “toll” to Young doesn’t just mean writing checks. It can also mean hiring former staffers who became lobbyists and now represent defense contractors before their former boss. Many of them gather and work at a lobbying outfit called Van Scoyoc Associates. Young’s former chief of staff Doug Gregory, former legislative aide Bryan Blom, and former district director David Jolly have all been employed there.55 The firm represents large firms like Lockheed Martin, but also a large number of smaller defense-related firms you have never heard of: DRS Technologies, SGT, Inc., and AeroVironment, Inc., to name just a few.56
Young’s daughter-in-law, Cindy Young, is also a lobbyist, who has represented (what else?) defense contractors large and small. Miss Young has represented half a dozen defense contractors.57
Defense contractors know the power of Young’s purse. Having received $45 million in earmarks from Representative Young since 2004, top-ten defense contractor Science Applications International Corporation (SAIC) had a vested interest in staying in the congressman’s good graces.58 When his twenty-year-old son received his GED and started working in the defense contracting business, SAIC made sure to offer him a plum job. The National Forensic Technology Center probably had a similar idea when it hired Young’s other son. Congressman Young had steered $28.6 million to the nonprofit over the previous decade.59
Tax extenders are essentially the Washington, D.C., version of the “mob tax”: paying members of Congress to do something that they are supposed to be doing in the first place. Those who wonder why the American tax code is so complex, convoluted, and constantly changing fail to appreciate what a wonderful tool it is for extortion. When you start seeing it as a source of enrichment for the Permanent Political Class, you will realize why we have the tax system we have.
3
Protection: for a Price
I have built my organization on fear.
—AL CAPONE
IT’S ONE OF THE OLDEST and most effective forms of extortion: the protection racket. Pay me money and I will promise to not make your life miserable. Fail to pay and bad things will happen to you.
Protection money has been the Mafia’s bread and butter for centuries. In the city of Palermo on the island of Sicily, 80 percent of the businesses pay protection money (pizzo) to the Mafia.1 If you fail to pay, you will be harassed, you might have your business burned down, and you might even lose your life.
In one famous case, a Palermo businessman named Libero Grassi refused to pay protection money and wrote an open letter to the mob in the local newspaper, Giornale di Sicilia. He addressed the letter “Dear Extortionist.” Nine months later, in August 1991, he was killed by the Mafia.2
The Permanent Political Class in Washington plays the protection racket too. Failure to pay will not get you killed—but it could kill your business. It might even make a difference in whether you will end up in jail. If protection money paid to the mob keeps them from literally burning down your business, protection money paid to the Permanent Political Class prevents them from figuratively burning down your business.
Current CEOs are loath to talk about it. They face regulatory and legal jeopardy and don’t want to make themselves a target for retribution. But former executives who are freer to speak out say it happens much more often than you might think. John Hofmeister, former president of Shell Oil, told me that while it didn’t happen to him during his tenure, he is familiar with the practice. “Anytime you are vulnerable to legal or regulatory compliance you can expect them to come after you with requests for money,” he said. “It’s like clockwork.”
Ray Plank, the founder and longtime CEO and chairman of Apache Corporation, is even blunter. “They basically come to you and say, ‘We are going to shove this bat up your ass and give you an enema. You better play ball.’ We saw a great deal of it. It’s an insidious blight.”
Companies large and small, as well as professionals like doctors, accountants, and lawyers, face a myriad of rules and laws that they are required to comply with every day. Undoubtedly, some of these laws are good. But many of them are complex and difficult to understand. Professor Alan Dershowitz estimates that today the average professional commits three felonies a day without realizing it, thanks to the complex layers of regulation and legal requirements that have been built up over time.3 And then there are the subjective legal actions that the federal government can take that might put you or your company in real legal jeopardy. This is precisely what happened when the Justice Department went after Microsoft in the 1990s on the grounds that it was engaged in anticompetitive activities. More recently, the Justice Department went after Apple and five book publishers over ebook pricing decisions. Fighting these cases costs tens and even hundreds of millions of dollars.
When Microsoft and other wealthy companies experience legal action that involves the threat of large fines (or perhaps even jail time for executives, depending on the charge), that makes them a prime target for financial shakedowns. Politicians and members of the Permanent Political Class are all too willing to offer some form of “protection” for the right price.
Indeed, consider the realities and the decisions that businesses must make when they are being investigated for possible criminal conduct by the Justice Department and then the president’s staff solicits them for donations. Or consider a lucrative industry under heavy political attack that is then asked to donate or hire individuals as consultants to make the problem go away.
Extortion: How Politicians Extract Your Money, Buy Votes, and Line Their Own Pockets Page 4
