Make Your Taxes Disappear!*
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A WILDLY UNPOPULAR loophole secured by four companies from Houston illustrates how easily special interests were able to hijack the American Jobs Creation Act. Weatherford International, Noble Corporation, Nabors Industries, and Cooper Industries—all located in or around the home district of House Majority Leader Tom DeLay—hired a small army of lobbyists in 2002 with a simple, if audacious, aim: to protect a tax benefit that the congressional leadership, and even President Bush, had vowed to end.
The provision in question allowed U.S. firms to open Potemkin headquarters in tax havens like Bermuda to hide their profits from the Internal Revenue Service. This so-called Bermuda loophole had saved companies like Accenture and Tyco International millions. Concerns about leaving other taxpayers to take up the slack were—at least in corporate boardrooms—easily dismissed. As one consultant from Ernst and Young advised at the time, "The patriotism issue needs to take a backseat."
But in the God-Bless-America fervor that followed 9/11, the press began spotlighting these "corporate turncoats," whose new headquarters often amounted to little more than a post office box with a beachfront view. Public outrage followed. In March of 2002, Iowa Senator Charles Grassley, the top Republican on the Finance Committee, vowed to close the loophole and promised "serious penalties" for any company that moved offshore. "Proceed at your own peril," he said. The Senate promptly proposed stiff fines for any company bolting to a tax haven after the date of Grassley's declaration. Rep. Thomas, the chief Republican tax writer in the House, soon introduced his own bill backing up Grassley's threat.
The tough talk worked. Several corporations scuttled talk of moving. Stanley Works, the tool company, even reversed its decision to relocate to Bermuda after a personal appeal from lawmakers—including DeLay. "We had Senator Grassley holding up our products and saying, 'Here is a company that is a traitor,'" said Mike Bartone, Stanley's vice president for taxes. "It was a factor."
But the Houston Four openly defied the Republican leadership. Placing potential profits over patriotism—and, seemingly, over prudence—each of the companies moved its headquarters overseas between April and June of 2002. It was a risk with a huge upside: Cooper Industries—a direct competitor to Stanley Works—stood to save $55 million a year by moving to Bermuda. Oil service firms Nabors Industries and the Noble Corporation would each shave at least $9 million from their taxes. For Weatherford, a third oil service firm, a Caribbean address would slash its taxes by a reported $40 million.
Cementing these gains, of course, would mean derailing Grassley's and Thomas' proposals. But, in the current Congress, that was nothing a couple million dollars worth of high-powered lobbying couldn't accomplish.
THE LAST GOLDEN AGE for corporate tax dodgers came in the mid-1980s. Businesses trafficked in paper losses to mask profits. Blue-chip corporations spent lavishly on equipment for the tax benefits of leasing it to other companies. By the end of his first term, Ronald Reagan promised to turn things around. "It would be immoral," Reagan said during his 1984 State of the Union address, "to make those who are paying taxes compensate for those who aren't paying their share."
Fixing the tax code fell to the economists at the Treasury. With few exceptions, special interests were kept at bay. Congress soon passed the Tax Reform Act of 1986—Reagan's signature domestic achievement. Although the bill lowered tax rates, it closed so many loopholes that corporations paid the IRS an additional $100 billion over the next five years. But this era of more equitable taxation was short-lived. As Treasury Department analysts later lamented, the new system only made the art of tax evasion more profitable. Two decades later the great American tax dodge was back: At least 82 companies in the Fortune 500 paid no income taxes whatsoever during at least one of the first three years of George W. Bush's administration.
Like Reagan, President Bush has repeatedly claimed that he wants to simplify the tax code. "The more simple it is," he declared on a campaign swing last August, "the better it is for the American people." But Bush showed none of the Gipper's mettle when it came to putting those words into action in the corporate tax bill.
The American Jobs Creation Act was a monster two years in the making. In January 2002, the World Trade Organization ruled that a $5 billion-a-year tax break for American exporters amounted to an illegal subsidy. Congress would have to repeal the law to avoid punishing European tariffs. But antitax crusaders on the Hill weren't about to stick corporate America with the equivalent of $50 billion in new taxes over the next decade, so the congressional leadership sought to replace the illegal benefit with a legal one.
With the corporate tax code in need of major surgery, Bush was presented with a once-in-a-generation opportunity for comprehensive reform. But the president refused to get involved. Unlike his approach to cutting personal income, dividend, and estate taxes, he didn't instruct the Treasury to craft a coherent policy. To avoid stepping on the toes of his corporate supporters by shuttering favored tax breaks, Bush simply let the Republican Congress have at it.
Lawmakers began with a modest reform agenda—one that included closing the Bermuda loophole and ending tax breaks to companies that let executives take personal flights on company aircraft. But reform quickly took a backseat to horse-trading. "The way you get the votes," said one tax lobbyist who worked on the bill, "is you buy them." The bill needed the support of hundreds of lawmakers, each with corporate constituents to please.
Corporate lobbyists began targeting members with plum committee assignments to sponsor their pet tax cuts. International Speedway Corp. spent $280,000 to retain four former congressional staffers. Senator Rick Santorum (R-Pa.), who has a Speedway track in his state, responded by adding $92 million in tax cuts for NASCAR racetrack owners. After collecting more than $45,000 in campaign contributions from Carnival Corporation, Senate Finance Committee members Lisa Murkowski (R-Alaska) and Bob Graham (D-Fla.) snuck in a $28 million tax break for cruise ship operators. Fellow committee members Olympia Snowe (R-Maine) and John Breaux (D-La.) both pushed a break for military shipbuilders with shipyards in their home states.
The bill quickly degenerated into a special-interest free-for-all. Even reform-minded senators weren't immune: "Nearly every member raised narrow-interest provisions," Grassley later remarked. "We all do it."
Illustration: Michael Llewellyn
