Why Are Politicians Allowed To Vote On A Bill They Profit From?

Members of Congress who voted to pass the tax reform bill could financially benefit from it, as International Business Times has reported. Specific provisions in the bill ranging from tax reductions on pass-through real estate LLCs to flat tax deductions for oil and gas master limited partnerships are likely to have a significant impact on some legislators’ tax bills. As those stories gained national attention, many readers asked, “How is this legal?” How are lawmakers allowed to vote on legislation that they could personally profit from?

The Senate and House have similar ethics rules governing using the legislative process for personal financial gain. The section on conflicts of interest in the Senate Ethics Manual states: ‘‘No Member, officer, or employee shall knowingly use his official position to introduce or aid the progress or passage of legislation, a principal purpose of which is to further only his pecuniary interest.”

This might appear to bar the kind of voting that took place this week. But according to the regulations, it does not. The reason why is straightforward, but underlines a more complex problem. In short: Legislative conflict of interest rules do not apply to tax bills. The longer answer is that the rules kick in only when legislation exclusively targets a specific company or would unfairly advantage specific individuals.

The House Ethics Manual says that “House precedents establish the rule that — where the subject matter before the House affects a class rather than individuals, the personal interest of Members who belong to the class is not such as to disqualify them from voting.”

This essentially means that so long as a lawmaker isn’t the only person or part of a very small group of people to benefit from legislation, then the lawmaker is allowed to vote.

“Lawmakers are not supposed to vote on something that specifically affects their financial interest,” Larry Noble, general counsel at the non-partisan Campaign Legal Center, told IBT. “But the ethics committees have said that that doesn’t apply if what you’re voting on is a law that affects a broad number of people or a group.”

So if you are invested in Facebook, you can vote on bills that affect the internet or the tech sector at large. But you can’t vote on bills that impact Facebook directly — by giving a tax break or a government contract to Facebook, for example..

Kathleen Clark, a professor of government ethics at Washington University School of Law, put it this way: “Congress has given its members the permission to enrich themselves through their votes on legislation as long as other people are also members of a group that is being enriched.”

Self-enrichment restrictions do not apply to tax bills

“Because tax bills affect almost everybody, you don’t have to recuse yourself from voting on a tax bill just because it affects you,” Noble said.

The Senate’s ethics manual also weighs in.

“The Committee recognizes that in many cases, legislation advancing through the Senate will have some impact on the financial situation of a member, officer, and employee. All tax legislation has such an impact. Ordinarily, however, the impact on an individual’s holdings is likely to be quite minimal in comparison to the impact of the legislation on the public and the public interest served . . . Legislation may have a significant financial effect on a Senator because his holdings are involved, but if the legislation also has a broad, general impact on his state or the nation, the prohibitions... would not apply.”

When talking about the ethics rules not applying to tax bills, the House and Senate ethics committees had in mind the fact that shifts in tax brackets and tax rates affect a broad class of people and so do not constitute a conflict of interest. It gets into a slightly murkier territory with the niche tax breaks that IBT uncovered, because they do not apply to a specific company such as one real estate firm or pipeline, but they are not as broad as a change to the overall tax bracket structure.

“This case and your reporting shows where the problems come up because there are specific provisions in a bill that may have a disproportionate benefit to certain members of Congress who are voting on it,” said Noble.

But ethics committees in the House and Senate are likely to be more permissive in allowing members to vote on legislation and read the restrictions on voting very narrowly. Part of the reason for that is because Congress effectively writes the rules that govern itself. But there is also a less cynical rationale, which is that Congress is an elected body most directly tied to its constituents and with fairly robust financial disclosure requirements, which — for instance — allowed IBT to report on the financial stakes of senators in the tax bill.

“Some would argue that since members are elected and since they have to disclose some information about their own finances that this in some way mitigates the conflict of interest, or at least manages it,” said Clark.

Politicians Do Not Have To Declare When They Are Recusing Themselves

This raises another issue: the public generally has no idea when politicians recuse themselves from votes due to conflicts of interest. Members of Congress do not have to declare when they are recusing themselves, and there is no record of when they do so. To the general public, it will just look like an ordinary abstention, which could be because they are on the fence on the issue or simply did not show up to vote.

“Unless a politician sent out a press release saying they abstained from a vote because of their investment, there is no way to know they didn’t just skip the vote because of a fundraiser,” Jordan Libowitz, of the watchdog group Citizens for Responsibility and Ethics in Washington, told IBT.

(This, it is worth noting, is an opportunity for reporters to dig into voting abstentions, particularly when a specific company is the subject of a bill.)

STOCK Act prevents insider trading for politicians

In 2012, President Barack Obama signed into law the Stop Trading On Congressional Knowledge Act , which essentially prevents the equivalent of insider trading for federal legislators. By virtue of their positions, politicians may often have access to information that would forecast the financial future of certain sectors or even specific companies, which would give them an unfair advantage in the market similar to executives trading on insider corporate knowledge. The STOCK Act prevents the members of Congress from acting on that knowledge.

That prohibition is broader than the legislative process, but could also apply to legislation, as when a lawmaker might know that legislation is coming down the pipeline that could affect a company or a class of investment.

“There was probably a point during secret negotiations or during conference when some members may have known that certain things were going to end up in the bill before anyone else,” said Noble. “And if you went out and bought a position in a real estate LLC then that would arguably violate the STOCK Act. But once it’s public information then there’s no issue with the STOCK Act.”

That last point is crucial to see how the regulations do not prevent the voting behavior that occurred on the tax legislation. Because the information in these bills was public (in the sense that it was accessible to everyone in a public bill, even though it had not been thoroughly reported on or scrutinized), the members of Congress invested in, for instance, real estate LLCs did not gain an unfair advantage from their positions. If future financial disclosures show that members invested in those LLCs while the bill was in conference and before the final bill’s language was public, that would potentially violate the STOCK Act.

What can be done?

Many observers have called for a more thorough disclosure regime. “I think every member who is voting for this bill should tell his or her constituents exactly how it’s going to benefit them personally,” said Sen. Chris Van Hollen, D-Md., on MSNBC Tuesday night.

“It’s a close call whether there should be some kind of additional notification required when a member is personally benefiting from something the member participates in,” said Clark. “The financial disclosures are made once a year and it really requires a lot of hard work to make sense of them. So one thing Congress could do if it doesn’t want to prohibit voting on bills is, for instance, require a banner on their congressional webpage saying, ‘I just voted on the following and this is my financial interest.’

“As it stands now, there’s a kind of fake transparency about it, but there are ways we could make it more robust.”