Tax Planning for the Lobby Tax

Abstract

In 1993, Congress eliminated the business deduction for lobbying. The disallowance extends to dues paid to tax-exempt trade and labor associations when those organizations conduct lobbying activities. Associations are required to notify members regarding the portion of their dues that is non-deductible or pay a flat 35% tax on their lobbying expenditures. This study examines the factors considered by associations in making the pay-or-notify decision, looking for evidence that associations consider the marginal tax rates of their members to insure that the party with the lowest marginal rate pays the tax. Data is obtained from the IRS and is supplemented by data collected in a mail survey. The evidence suggests that associations do not necessarily attempt to minimize the total tax cost to all parties. This study identifies a situation where non-profit firms might fail to implement an optimal tax planning strategy, and where the absence of a competitive market allows this inefficiency to persist.

Citation

Hofmann, M.A. (2006), "Tax Planning for the Lobby Tax", Luttman, S. (Ed.) Advances in Taxation (Advances in Taxation, Vol. 17), Emerald Group Publishing Limited, Leeds, pp. 37-63. https://doi.org/10.1016/S1058-7497(06)17002-7