The “Active Financing” Exception, aka the GE Loophole

Congress has becoming infamous for doing nothing, as people who have lost their unemployment benefits viscerally know. However, today the Senate Financial Services Committee started the process of enacting the “Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act.”

This act addresses dozens of tax breaks that ended last year. If the Congress continues to do nothing, billions more would flow into the treasury. More than enough to pick up the $10 billion tab for extending unemployment benefits.

Re-enacting some of the tax breaks would be easy for members of Congress to defend to their constituents, such as a provision that allows school teachers to deduct the cost of the classroom supplies they buy out of pocket. But some provisions are simply indefensible.

The GE Loophole

General Electric (NYSE: GE) is famous for paying little or no income tax. Indeed, GE was one of 26 Fortune 500 companies that was consistently profitable for the five years 2008-2012, and yet paid no income tax across those years, according to this report from Citizens for Tax Justice (CTJ). In fact, across those years GE received more than a $3 billion net refund. While GE and the rest use multiple techniques to extract your tax dollars while keeping all their profits, one has informally taken its name.

See also: 10 Special Interest Tax Breaks That Cost You Plenty - Part 9

The GE loophole is available to any company with financial income that it can claim was generated offshore, such as by a foreign banking subsidiary. The loophole rewards the American parent company for investing overseas by sheltering its profits from U.S. tax until the American parent brings the money home.

So GE can avoid the tax bill as long as it likes by keeping its profits invested in other countries. Not only does the loophole shortchange taxpayers, it also creates an incentive to invest overseas instead of here at home.

Worse, the nature of financial income makes it relatively easy for companies to use the loophole to assign profits to subsidiaries in tax haven countries while assigning losses here at home.

In 2010, Forbes dryly observed that “Over the last two years, GE Capital has displayed an uncanny ability to lose lots of money in the U.S. (posting a $6.5 billion loss in 2009), and make lots of money overseas (a $4.3 billion gain).”

President Reagan Helped Close This Loophole

Precisely because the nature of financial income is so easy to manipulate for tax advantage, the 1986 tax overhaul achieved by President Reagan and a divided Congress stopped it and required these profits be taxed immediately, regardless of where they were earned. In 1997, fierce lobbying culminated in persuading Congress to reinstate the loophole—known officially as the Active Financing Exception—for tax year 1998 only.

President Clinton tried to line-item veto it, but was blocked by the Supreme Court. After that, Congress has “extended” this loophole for a year or two at a time. The bill the Senate committee is working on today is the current effort to “extend”—really, re-enact, this and other loopholes.

Just as in the 1990s, this year’s effort is backed by fierce lobbying. GE leads the current effort, according to a very recent report by Americans for Tax Fairness and Public Campaign. The report found that—just on the GE loophole alone—292 individual lobbyists representing 41 companies and trade associations worked on Congress, and 98 of them were paid for by GE. Twenty-eight of those are “revolvers”—former members of Congress, former Congressional staffers, or former Executive Branch officials.

These efforts dwarfed those of the next pushiest company on this issue, Citigroup (NYSE: C). GE showed up in the lobbying reports on this loophole more than twice as often as Citi, which itself showed up more frequently than Prudential Financial (NYSE: PRU), Bank of New York Mellon (NYSE: BK), Morgan Stanley (NYSE: MS), Goldman Sachs (NYSE: GS), Principal Financial Group (NYSE: PFG), State Street Corp. (NYSE: STT) and American Express (NYSE: AXP).

More Than the GE Loophole At Stake

The Financial Accountability & Corporate Transparency (FACT) Coalition opposes another grotesquerie likely to be included in the final bill: the Apple (NASDAQ: AAPL) loophole. CTJ, which isa member of FACT ,objects to a few others as well. “We did not expect bonus depreciation to be in the bill and were shocked that it is”, explained Rebecca J. Wilkins, CTJ’s Senior Counsel for Federal Tax Policy. “It’s just so expensive and there’s no evidence that it actually stimulates the economy.”

Notably, if the Do Nothing Congress let just bonus depreciation and the GE loophole stay expired—by doing nothing on them—that would raise the $10 billion in 2014 needed to pay for the unemployment insurance extension desperately needed by more than two million Americans. (See items #14 and #22 on the chart by the Joint Committee on Taxation available for download here.)

If you want to watch Chairman Sen. Ron Wyden (D-OR) and his Senate Finance Committee take on these issues, watch the open executive session here.