January 22, 2003
Contact: Bob Hall, 919-489-1931

DESPITE BUDGET CRISIS, TOP POLITICAL DONORS
CONTINUE TO GAIN NEW TAX BREAKS

Six corporations that received a multi-million dollar tax break from the N.C. General Assembly in October 2002 donated a record amount of money to the campaigns of state legislators later that month, according to Democracy North Carolina, a Carrboro-based campaign finance watchdog group.

Altogether, the political action committees (PACs) of the state's four biggest banks and two largest electric utilities gave more than $425,000 to state legislators in the month after gaining a tax break worth at least $20 million a year. The bill establishing the tax change sailed through the General Assembly in the last 10 days of the 2002 session and was signed into law by the governor on October 3.

When the legislature adjourned that week, PACs banned from making contributions during the session began issuing checks at a record pace, with the big banks and utilities in the lead and the election only a month away, said Bob Hall, Democracy North Carolina's research director.

From Oct. 4 to Oct. 16, Duke Energy's PAC shelled out $116,500 to lawmakers, an all-time record for donations from a corporate PAC to legislators during any two-week period in N.C. history. Bank of America's PAC paid out $94,800 to incumbent legislators on October 18, a one-day record.

The October donations anchored another generous cycle of giving for the PACs of the four top banks and two utilities, Hall said. Fewer legislators were seeking re-election in 2002, but they got about as much money from the six PACs as all 170 received for their 2000 elections - about $700,000 per cycle for a total of $1.4 million. Bank of America's PAC led the list, donating $346,600 over the past four years to legislators in office in October. The Duke Energy PAC followed with $321,550.

No industry's PACs supplied as much money to the legislators' campaigns in 2000 and 2002, on a per-company basis, as did the state's banking and utilities industries, according to Democracy North Carolina's research. And no other industry won so large a tax reduction in 2002.

"No wonder we have a budget crisis," said Hall. "There's a pattern of big donors getting tax breaks. Should we even expect legislators to make the powerful interests that bankroll their campaigns pay a fair share of taxes? Or do they need an alternative source of campaign funds to be independent?"

In addition to the $1.4 million to legislators, the six PACs contributed at least $627,000 to state political parties, leadership caucuses, and other state candidates in the 2000 and 2002 election cycles.

Officials at the companies say their donations are not connected to any special favor, but critics of the campaign finance system disagree.

"The public has every right to be suspicious when they see major political contributors getting tax breaks and subsidies that shift more of the tax burden onto others," said Hall. "We now have a political system in North Carolina that makes politicians desperate for campaign money and, as a consequence, gives large donors an unhealthy advantage in shaping legislation that affects all of us."

The outcomes of policy debates don't always please donors, Hall noted. In some cases, major donors are on both sides of an issue, such as those that pit one industry against another. In other cases, the final bill that passes gives the donors much of what they want, but not everything.

The "victory with compromise" scenario is how Hall characterized the tax windfall that banks and utilities gained from the bill passed in the final days of the 2002 General Assembly.
The bill modified a law enacted in 2001 that changed the rules for calculating the state income taxes owed by corporations with subsidiaries. The 2001 rules were projected to generate about $32 million in new revenue per year, not counting an unknown amount from banks.

The big banks and utilities had agreed to the 2001 law, but when it turned out to significantly increase their tax bills, they complained to key legislators, held back their tax payments, and threatened to challenge the law in court. After weeks of backroom negotiations, legislative leaders agreed to change the law in order to get smaller but dependable increases in taxes from the banks and utilities.

"There may be legitimate reasons for these companies to receive a smaller tax bill than what the 2001 law required," said Hall. "But the way the 2002 legislation developed in the midst of a severe budget crisis - behind closed doors, at the end of the session, with heavy pressure from political donors - raises serious questions about how debates on tax policy and tax fairness are conducted.

"To plug the state budget hole in 2002, most taxpayers got a sales-tax increase and lost the tax cuts promised in 2001, but the big banks and utilities got away with not paying what they owed," he added. "They combined the threat of not paying any new tax with the goodwill gained through their campaign cash to win over key legislators and squeeze the rest into submission."

According to Democracy North Carolina, the House Democratic leadership pushed hardest to force corporations with subsidiaries to pay at least $82 million in new taxes for 2002. That was less than the $120 million budget analysts determined all firms could owe under the 2001 law, but $50 million more than the original, partial projection of $32 million.

However, Senate leaders decided not to insist on collecting the added $50 million beyond 2002, cutting it nearly in half for later years. The Senate also inserted a provision to study and revise the tax as early as 2003, and it put a cap of $11 million on the annual tax bill of any bank and its subsidiaries.

Together, the changes reduced the tax burden on banks and utilities by between $20 million and $52 million a year, said Hall. The changes also leave intact another benefit - the infamous "bank tax loophole" - which allows banks to deduct the expenses incurred in earning tax-exempt income from their taxable income and thereby save about $100 million in annual taxes, according to legislative staff.

State Senator John Kerr, who spearheaded the backroom negotiations and pushed the new bill as co-chair of the Senate Finance Committee, got a total of $26,900 from the four big banks and two electric utilities in his 2000 and 2002 campaigns, according to Democracy North Carolina's analysis. On his "statement of economic interest," Kerr lists himself as a member of Branch Banking and Trust Company's local advisory board. BB&T is the state's third largest bank; its PAC gave $61,220 to legislators elected in 2000 and $81,674 more during their 2002 campaigns, including $8,000 to Kerr.

Sen. David Hoyle, the other Senate Finance Committee co-chair, also worked on the bill, but excused himself from voting to avoid the appearance of impropriety. He is chairman of Citizens South Bank, and he received $47,300 from the PACs of the six banks and utilities.

Democracy North Carolina found that legislators who voted for the bill received an average of $8,728 from the six banking and utility PACs in 2000 and 2002. By contrast, the handful of legislators who opposed the bill - 15 in the House, none in the Senate - got an average of $1,080 from the PACs.

"The whole thing looks like a classic case of major political donors getting special favors that cost the rest of us millions of dollars," said Hall. "It helps explain why tax fairness is not addressed as a remedy for the state's budget crisis. The current system puts the burden of new taxes and new cuts on those who lack the political cash to buy insider influence, make deals and protect themselves."

To view the charts that accompany this release, click here (PDF format).