Return on Lobbying Overstated by Report

An April 2009 academic paper titled “Measuring Rates of Return for Lobbying Expenditures: An Empirical Analysis Under the American Jobs Creation Act” has been floating around the web for a couple of years and is occasionally cited for a shocking statistic: it found that firms which lobbied for the American Jobs Creation Act of 2004 (a tax holiday which led to the repatriation of around $300 billion in profits that U.S. corporations were keeping overseas in order to save money on taxes) saw a 22,000 percent return on their lobbying investments.

Yes that is three zeroes you see there. Who says a dollar doesn’t go far anymore?

The paper, well researched and written by three professors at the University of Kansas acknowledges that the bulk of academic work on the effectiveness of lobbying has been inconclusive, but the authors apparently believe they have unlocked the secret to quantifying the unquantifiable: tax policy. The tax holiday was a profitable one for a large number of multinational firms and the paper intends to prove that the lobbying done in 2003-2004 to get the bill passed was the cause.

Of the 496 firms who repatriated money based on the holiday, 93 had lobbied congress to pass the measure. Those firms repatriated $208 billion on a lobbying investment of $283 million and together received $63 billion in tax savings. Dividing the tax savings by lobbying expenses results in a 22,000 percent rate of return.

With numbers like that the case for lobbying looks solid, right?

As intensive as their research was they completely omitted one glaring issue: they did not indicate whether the lobbying conducted actually changed any votes. Without looking at the voting history of any of members of congress who voted on the bill, nor considering that they might have voted for the legislation for partisan or ideological reasons regardless of the amount of money spent on lobbying, the researchers made the strenuous and unsupported leap of faith that lobbying was the sole cause of the bill’s passage.

They cite as further evidence that lobbying had a decisive impact the lesser returns for companies which did not lobby. It stands to reason, however, that since the law applied equally to all of the companies (no type of entity was given special consideration in the legislation), companies who had less to gain saw less utility in spending money lobbying congress, preferring to let the larger companies foot the bill.

As the report finds (a finding they were admittedly surprised by), larger companies (as opposed to more profitable companies) were more likely to repatriate larger amounts of cash and thus receive more significant tax breaks. This does not prove that more lobbying equals more benefits as implied in the paper, but does indicate larger firms with more money to spend on lobbying were more inclined to do so.

This is not to say that lobbying has no impact on legislation; obviously it does, or companies wouldn’t bother with it. But making a wild claim that companies are getting a 22,000 percent return on lobbying without examining how the legislators had voted on similar legislation in relation to the dollar amount spent on lobbying is presumptuous, provocative and of doubtful value.

The Center for Competitive Politics is now the Institute for Free Speech.