WASHINGTON -- As the parties battle over taxes, the deficit and economic inequality, two arguments that have been marshaled to advocate for the Democratic position are that taxpayers should not be subsidizing private jet travel and that Warren Buffett's tax bill is way too low -- lower, Democrats and Buffett himself have repeatedly noted, than his secretary's.
Buffett's belabored secretary has become such a ubiquitous gambit in the tax debate that she was invited to attend the president's State of the Union address as an honored guest. Buffett's pleading with Congress to hike his tax rate has grown so incessant that Republicans routinely suggest the Omaha billionaire should simply, as New Jersey Gov. Chris Christie put it, "write a check and shut up."
But when a Buffett company had a chance to tackle both problems, it chose to do the opposite. And it spent handsomely on K Street to get it done.
Berkshire Hathaway-owned NetJets Inc. spent more than $2.5 million on a squadron of lobbyists who successfully crafted tax legislation to benefit a handful of private jet companies, according to a HuffPost analysis of lobbying disclosure records.
The Federal Aviation Administration Modernization and Reform Act passed in February after wending its way through Congress over much of the last decade. The bill provides a broad overhaul of national aviation, which includes improving runway safety standards and funding aviation safety research. The bill also advances NextGen, a program to replace the aging radar system with GPS, which the FAA says will reduce delays, accidents and air pollution.
The key tax provision at issue was part of legislation aimed at modernizing the infrastructure of the aviation industry. The law carved out fractionally owned private jets from commercial jets, meaning that companies like NetJets will pay lower taxes over the next four years than they do today. According to the lobbying disclosure records, NetJets spent more than $1.5 million lobbying to win that specific provision alone.
The NetJets effort will deprive the government of roughly $25 million in annual revenue over the next three years due to a provision that benefits the fractional aviation industry, which allows individuals and companies to buy a share of a private aircraft, like a time-share. In 2010, according to the company's CEO, NetJets controlled 70 percent of the fractional jet market share. Seventy percent of $25 million is $17.5 million. In March 2011, Buffett noted that NetJets claims a market share five times bigger than its closest competitor.
The law hikes taxes and fees on commercial airlines to pay for some of the upgrades. But for private jet companies like NetJets, it changes the way taxes are levied. NetJets, previously assessed in the same way as commercial airlines, argued that the formula that applied to commercial jets created confusion and uncertainty in the fractional industry. NetJets sued the IRS over the enforcement of the provision, complaining of an "illegal" $643 million assessment.
NetJets won in Congress instead. Jeff Munk of Hogan Lovells, formerly known as Hogan & Hartson, was one of the lobbyists who represented NetJets. He said the company pushed for the change to simplify the tax structure, claiming that the provision wasn't a tax break, but rather a clarification of the code that would bring in the same amount of revenue to the government. The new way of assessing the fee focuses on private jets' fuel consumption.
"If you have to divide it up, it's difficult to figure out whose share is what in such a large program," Munk said. "More than anything, this just settled the dispute with the IRS. It's hard to run a business if you don't know what the tax is going to be."
Robert Tanner, vice president of government affairs for NetJets, also highlighted the provision's lack of cost to the taxpayer over a 10-year period. "This is not a tax break for fractional aviation programs but instead a legislative clarification," said Tanner in a statement. "The Joint Committee on Taxation and various Congressional Offices advised that the impact on the Aviation Trust Fund when making this legislative clarification should be revenue neutral. The 10 year time frame was proposed to the fractional industry by these offices."
It was, to be sure, a clarification, but according to an analysis by the JCT, it'll also be a boon to the industry over the next few years while it's in effect. Hill staffers involved with the legislation say that Tanner is correct, and that the goal of Congress was to make sure the change was judged revenue neutral by the JCT.
The provision's revenue neutrality, however, is a product of how it's been framed. The legislation appears cost-free to taxpayers only over a 10-year period: In fiscal year 2013, the first full year the new provision kicks in, it'll cost taxpayers $23 million in lost revenue, according to an analysis by the JCT. The following two years, it costs $26 million and $28 million, respectively.
It becomes revenue neutral, in the eyes of Congress, by expiring. In 2016, the provision simply goes away, and the tax policy reverts to the previous structure (over which NetJets initially sued). With the provision gone, according to the JCT analysis, the industry starts paying more into the treasury: $101 million over the subsequent three years, 2016 to 2018. It raises a similar amount over the rest of the decade.
Of course, once the provision is in place, there is nothing to prevent NetJets from lobbying to extend that provision in 2016 to delay its expiration. The termination date has a happy consequence for K Street, too, as companies like NetJets are pressured to keep paying lobbying fees to keep the tax cut in place.
"Like all transportation reauthorization (aviation and highway) bills, they have a sunset, typically three to five years. While definitions of various types of transportation do not usually change in follow-on legislation, the tax provisions that support those types of transportation can be adjusted," said Tanner. "The legislative vehicle best suited for this clarification was the FAA Reauthorization. Unfortunately, that piece of legislation underwent 23 extensions before it finally got passed. Time is what contributed to the cost of the industry's efforts to seek this legislative correction/clarification."
NetJets persuaded similar companies to sign a letter endorsing the change, but no other company spent the type of money lobbying as NetJets did and, said people who worked on the issue, the company was clearly the driving force behind the reform.
Senate lobbying disclosure records show NetJets paid lobbying firm Hogan Lovells $260,000 in 2011 to advocate for the tax change. Between 2002 and 2011, it spent more than $1.5 million lobbying on that specific provision and more than $2.5 million overall lobbying on tax policy, retaining a total of three high-powered lobby shops, as well as hiring individual lobbyists directly.
The legislation was written in the Senate, according to the bill's conference report. One of NetJets' home-state senators, Rob Portman (R-Ohio), shepherded the measure through.
Berkshire Hathaway did not respond to a request for comment.
Munk said that Buffett himself had not been involved in any of the lobbying.
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Posted: 03/ 6/2012 11:29 am Updated: 03/ 8/2012 6:15 pm