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Corporate Lobby-Driven “Active Financing Tax Exception” to Cost Taxpayers $11 Billion Over Two Years

For the past fifteen years, Americans have been losing big dollars to lobbyists who have forced the extension of tax policies that allege to defend against double taxation. Opponents of such credits argue that they are nothing but tax shelters for Ethanol producers, NASCAR racetracks and the like. Among the techniques used is “active financing,” allows financial institutions and manufacturers a tax haven on overseas income for which the American taxpayer is footing a hefty bill.  The “Active Financing Income Exception” is defined as the following:

interest and related income of a foreign subsidiary is generally subject to current taxation without benefit of deferral. These rules historically have aimed at requiring current taxation of income that is passive or easily moveable, although some forms of active income are also subject to these rules. A temporary exception to subpart F permits deferral of certain types of income derived from the active conduct of a banking, finance, or insurance business.

The recent budget showdown featured Republicans and Democrats arguing that tax loopholes need to be closed, but “active financing” seemed to be entirely off the table thanks to the powerful lobbyists entrusted with keeping it untouched. Under the Obama Administration, the “active financing” lobby Elmendorf Ryan has recieved $1.03 million to work on behalf of some of America’s largest corporations. Bank of America and CitiGroup saw record highs on the stock exchange the day after the “fiscall cliff” deal due in part to the active financing income exception extension. This detail signaled a major victory for the bedfellow revolving door relationship between Washington and Wall Street.

Perhaps the best way to measure the importance of a piece of legislation is to see how much was spent in lobbying fees to ensure its passage or in this case its renewal.  Under the auspices of ensuring “that U.S.-based financial services [businesses] are able to continue to operate competitively and provide the funds needed for investment and economic growth,” the Active Financing Working Group (AFWG) paid $540,000 in lobbying fees in 2010.  The AFWG, a coalition of trade associations and companies, paid Elmendorf Strategies to extend the exception which has drawn fire from watchdog groups since its passage in 1997.  

The AFWG works on behalf of business interests such as GE, J.P. Morgan Chase, and Caterpillar and Elmendorf Ryan is a veritable poster child for the revolving door culture. Elmendorf spent the nineties staffing for Democratic powerhouses like Dick Gephardt and Dennis Eckart before becoming the Deputy Campaign Manager of John Kerry’s failed 2004 Presidential run. His now-partner James “Jimmy” Ryan spent the nineties working his way up the totem pole in the office of Senator Harry Reid. He would spend the following decade as the Senior VP of Federal Government Affairs for Citigroup.

Their team is rounded out by Robert Cogorno, former Floor Director for House Majority Leader Steny Hoyer, Shanti Stanton, former Nancy Pelosi aide and lobbyist for U.S. Smokeless Tobacco, and former Kerry counsel/Microsoft Director of Government Affairs/Lobbyist Barry LaSala.

Together this influential group has guarenteed a tax exception that will ostensibly prevent companies from “double taxation.”  Upon further review, though, this is simply a loophole brokered by those who help pull the strings for the ever-shrinking world of power politics and big business. According to Steve Wamhoff, legislative director at Citizens for Tax Justice:

“This loophole creates an enormous tax shelter for the companies who have lobbied it into law.  It ought to be allowed to expire.”

Companies have long been able to defer U.S. taxes on money earned by their offshore subsidiaries but financial institutions were not allowed to do this until 1997. Now, the lobby propping up this loophole has too much power to be killed off. In reporting on the extension, The Huffington Post quoted Phineas Baxandall, senior analyst for tax and budget policy at the U.S. Public Interest Research Group:

“This shows that the lobbyists are able to get what they want even when everyone else is starving.  It also shows they are best able to get what they want when no one else is paying attention.”  

The active financing extension was lumped into a “fiscal cliff” deal that included less publicized tax credits such as those for teachers who buy their own school supplies.  These small potato issues are nothing compared to the revenue losses tied to America’s largest financial institutions enjoying an overseas tax holiday.  According to HuffPo:

The financial services industry, whose leaders had earlier joined a group of other corporate executives pushing for a “fair” solution to the fiscal crisis, is one of the primary beneficiaries of special-interest tax breaks. The active-financing exception, for example, permits banks like Morgan Stanley to avoid the 35 percent U.S. corporate tax rate on interest income from money lent overseas. A handful of other U.S.-based multinational companies with financing arms, such as Ford Motor Co. and General Electric, also use that exemption to lower their tax bills. The two-year cost to taxpayers is an estimated $11.2 billion, according to the congressional Joint Committee on Taxation.  


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