The Fine Print: How Big Companies Use Plain English to Rob You Blind

by David Cay Johnston

  Perhaps you saw Public Enemies, the 2009 movie about the Depression-era bandit John Dillinger, whose bank heists and jailbreaks left ten men dead in nine months. Public Enemies starred Johnny Depp as the counter-vaulting bandit who loved submachine guns.

  Part of the story involved Dillinger robbing a Racine, Wisconsin, bank, then hiding out in a northern Wisconsin lodge. History tells us that he and his gang stole about $5 million in today’s money and, in doing so, ruined several small Midwest banks. History also tells us that, much more recently, General Electric, whose Universal Studios made the movie, legally robbed Wisconsin taxpayers of almost as much as Dillinger did.

  This is how it worked. Many towns and forests could have been used as stand-in locations, but the producers chose to film scenes in Oshkosh and Racine. The reason was not unique scenery, but taxpayer greenery. A state law there gave the film producers tax credits totaling $4.6 million. The amount the producers spent filming in Wisconsin? They claimed $5 million.

  The Wisconsin tax credit reimburses twenty-five cents on each dollar spent in Wisconsin shooting a film or commercial or making a video game. Then the state reimburses most of the wages paid to those working in a film. And on top of that are other, smaller tax benefits. In theory these credits reduce the state corporate income taxes owed on any profits from a film. But if there is no corporate income tax due, the state just cuts the filmmakers a check. That’s the real benefit—cash.

  When you break it all down, Universal Studios produced the Wisconsin portion of the movie at a net cost of eight cents on the dollar. To appreciate what a massive subsidy this is, consider this: most businesses would be thrilled to earn a profit of eight cents on the dollar. On average the nearly 5.8 million corporations that filed federal tax returns in 2007 kept as profit less than six cents on each dollar they took in from customers.

  Given the opportunity to recover from Wisconsin taxpayers ninety-two cents on each dollar they spent, it should not be surprising that filmmakers found it lucrative to make brief stops in the dairy state. In 2007, the year before this giveaway began, almost no filmmaking or television production occurred in the state, but in 2008 parts of eight films, sixteen television shows and a pair of commercials for national broadcast were shot in Wisconsin. Two video games also got subsidies.

  Welfare for Hollywood is bipartisan. The two biggest champions of this Wisconsin giveaway program were Lieutenant Governor Barbara Lawton, a Democrat, and state senator Ted Kanavas, a Republican. The third ranking official at the Wisconsin Commerce Department, Zach Brandon, told the Milwaukee Journal Sentinel that it was not as if the tax credits were a drain on the state economy. “It’s a wash,” he said.

  Brandon needs a refresher in grammar-school arithmetic. In fact, the giveaway to General Electric was the equivalent of giving away the state’s share of roughly a billion dollars of business activity in the state. That is about how much revenue corporations must collect from their customers to earn enough profits to pay as much corporate income tax as the state gave away for Public Enemies.

  In fact, the $4.6 million that General Electric’s Universal Studios received from Wisconsin taxpayers was more money than all of the corporate income taxes paid by 83 percent of the nearly 45,691 companies that filed Wisconsin tax returns in 2006, the latest year for which data is available.

  Nearly thirty thousand of these companies paid no tax because they did not earn a profit. In reality, many of these firms actually did earn a profit, just not under Wisconsin law. Thanks to the generosity of Wisconsin politicians, many of these thirty thousand companies claimed that fees their local operations paid to their corporate parents ate up the profits earned in Wisconsin.

  For example, chains like Target, Walmart and Hilton charge their Wisconsin operations a royalty to use their logos on signs marking their buildings. These royalty payments funnel money out of Wisconsin to states such as Delaware, Nevada, Texas and Wyoming, where corporations pay little or no tax on their profits. SC Johnson, the home products company, and two other Wisconsin businesses owned by the Johnson family paid no Wisconsin state income tax from 2000 to 2008, public records show.

  When the Wisconsin profits are so big that royalties alone cannot make those profits vanish, other profit-removal devices can be used. Many corporate parents act as banks, requiring their subsidiaries to symbolically turn over all of their cash every night. A minute later the cash is lent back to the local operation, along with an interest charge.

  The parent company can also charge its local operation a management overhead fee. It can inflate the prices of goods it buys and resells to the local operation. This last technique is similar to what American multinational companies do when, on paper, they ship goods through the Cayman Islands before they reach your shopping mall. This and other accounting techniques let the companies report little profit or even losses in the United States, while on paper earning their profits in tax havens like the Caymans.

  The subsidy for Public Enemies, which earned $214 million worldwide at the box office, also shows how big businesses have arranged the laws to favor them at the expense of the family-owned businesses that dominate in numbers but are pipsqueaks in profits. Keep in mind that 80 percent of American companies have less than $5 million in assets and two-thirds have less than $500,000 in assets. After taxes these 4.7 million small businesses keep not quite three cents on each dollar they ring up at the cash register, my analysis of IRS data reveals.

  Official state data show that 8,010 small Wisconsin companies eked out a profit of less than $25,000 each in 2006. Their average profit came to less than $7,000 each, on which they paid an average tax of $545. Together these small businesses paid Wisconsin nearly $4.4 million in corporate income taxes, almost exactly the amount of money that flowed out of state coffers to the makers of Public Enemies.

  In effect, Wisconsin politicians forced the owners of these 8,000 small, family-owned and taxpaying businesses to turn over a month’s profits so the money could be given to one of the biggest companies in the world, General Electric, and its partners to make a film glamorizing violent theft. This transfer illustrates how small businesses, as well as individuals, are forced via the fine print to give some of their substance to giant companies.

  The question Wisconsin taxpayers should be asking is how much better off those 8,000 small businesses would be if they had been able to hold on to that $4.6 million instead of being forced to subsidize General Electric’s Universal Studios. What permanent jobs or higher wages or stronger business finances would have resulted had those tax dollars stayed in Wisconsin, instead of being sent off to Hollywood and to GE headquarters in Connecticut, the highest per capita income state in the country?

  State officials say the purpose of the tax credits is to create a twenty-first-century economy by helping establish a film industry in Wisconsin, a state with an economy dependent on cows, forests and a declining industrial sector that prospered in the twentieth century making Rambler automobiles and Schlitz beer. The advocates of the Hollywood giveaway argue that throwing tax money at Hollywood will build up a modern Wisconsin workforce; their interviews and speeches are filled with talk of movie-support jobs, everything from hairdressers and makeup artists to construction workers who can build sets. That’s not exactly cutting-edge twenty-first-century work, even if the politicians may dream of computer graphics and other high-tech businesses serving Hollywood. The reality is that these digital jobs can be done anywhere the Internet exists, and Mumbai has a better shot at this work than Madison.

  Moreover, giving money to Hollywood to create jobs, even temporary jobs, in Wisconsin makes little sense if the work goes to people from Beverly Hills, Malibu and the rest of Southern California. That is just what happened with Public Enemies. About $2.7 million of the $4.6 million giveaway was for work performed by people flown into Wisconsin to work on the film.

  A tenth of the money went to benefit just one employee on the film, Michael Mann, best known as the producer of the sty
lish 1980s television series Miami Vice and such unusual films as Hancock, a comedy about two Greek gods living in modern-day Los Angeles. Wisconsin taxpayers shelled out $450,000 of the $1.8 million that GE said was paid to Mann, the writer, director and producer of Public Enemies, for his work during filming in Wisconsin.

  The Wisconsin Commerce Department issued a report in May 2009 on the efficiency of the tax credits program. It was one of those dry tomes meant not to be read, but to collect dust on a shelf lest the voters find out how the rich are using politicians to pick the people’s pockets. The study found that some local jobs were created by the Hollywood tax credit. Among these were temporary construction jobs making sets. But the study also compared the cost of these jobs to other jobs the state created through more traditional uses of tax money. The temporary film-industry jobs cost taxpayers, on average, twenty times as much as the other jobs the state created.

  LOOTING THE LOCATIONS

  If Wisconsin were the only state giving money away to wealthy moviemakers, the concern would be parochial. Unfortunately, forty of the fifty states have such Hollywood welfare programs. These states are now locked in competition to determine who can give the most money away, and they are also competing with giveaways by Canada and Eastern Europe. Tax welfare for Hollywood explains why careful viewers can discern Toronto towers posing as Manhattan skyscrapers.

  GE’s Universal Studios was not alone, either, in using pens to pry open state tax vaults and run away with tons of money. Rupert Murdoch’s News Corporation, Sumner Redstone’s Viacom, Dreamworks (owned by billionaires Steven Spielberg, Jeffrey Katzenberg and David Geffen), Disney and other film studios are all legally robbing taxpayers at a pace far beyond the wildest dreams of John Dillinger and his bank-robbing gang.

  Louisiana gave millions to Hollywood in 2007 and then gave even more in 2008. Louisiana, New York and Rhode Island are among the states using taxpayer dollars to build soundstages to benefit Hollywood. One is proposed in Delaware, too, to be financed with tax dollars and money from a carpenters’ union pension fund.

  Pennsylvania taxpayers gave away $72 million in 2007–2008 to Hollywood. Among their gifts was $12 million to Murdoch’s Fox Studios for The Happening, a film about mass suicides; $8.5 million to Dreamworks for The Lovely Bones, about a murdered girl who comes back to occupy another girl’s body and have sex with the other girl’s boyfriend; and $5.7 million for Zack and Miri Make a Porno, a comedy about a pair of down-on-their-luck platonic friends who seek riches by making an XXX-rated movie and fall in love along the way. The costs of subsidizing these commercial creations were borne by Pennsylvania schoolchildren and readers as budgets for public education and libraries were cut.

  The most generous state in giving welfare to Hollywood is Michigan, whose fortunes have declined for more than a third of a century along with those of the domestic auto industry. Makers of thirty-two films spent $65.4 million in the Wolverine State for salaries, goods and services in 2008, according to Michigan State University researchers. The tax credits cost $48 million. That means that the state gave Hollywood filmmakers seventy-three cents of taxpayer money for each dollar Hollywood spent in Michigan, assuming the filmmakers were scrupulous in not overstating their expenses, which would increase their welfare check.

  Based on the 4.95 percent tax rate Michigan applies to corporate profits, that $48 million giveaway to Hollywood represents the state’s corporate taxes on $16 billion worth of revenue to business.

  A report by the Michigan senate staff concluded that “the tax revenue generated from the additional activity would be unlikely to offset completely, or in some cases, even offset significantly, the cost of the proposed credits and deductions, even over the long run.” That’s bureaucratese for This giveaway cannot earn back what it cost and is rapidly draining tax dollars out of Michigan.

  The Michigan senate staff report made a crucial point about why these tax giveaways to motion picture projects are a sheer waste of taxpayer money. Filming on location is inherently fickle, temporary and movable. Films shot partly in Michigan do not represent fixed investments. A movie shot on location is not like a factory, in which the owners have invested in unique manufacturing equipment and customized buildings, which they have an incentive to keep productive until they wear out decades in the future or demand for their products ebbs. Location shoots are not even like filming in a studio on soundstages that are costly to build and maintain.

  The Hollywood studios just use Michigan as a location, shooting its gritty industrial cities and aging factories, its lush forests and Great Lakes shorelines. They fly in the actors, rent hotel rooms, run the cameras for a few hours and leave. All it takes to switch filming—and the jobs that go with it—from Michigan to Louisiana is a slightly larger tax credit from the Pelican State. With a quick polish of the script by a screenwriter, an Upper Peninsula hunting scene can be shot in the bayou. The loons become pelicans.

  To boost their welfare checks, studios tell the companies they rent cameras from to briefly occupy a vacant space in the state where location shooting will take place. That way they can count the cost of the camera rental as an in-state expense. It’s what happened when the makers of Public Enemies rented cameras from the temporary Wisconsin storefront of a Chicago-based movie camera rental business.

  The state officials whose jobs depend on maintaining these giveaways, and the moviemakers whose profits are enhanced by them, all say this is about creating jobs. That some politicians arrange to get photographed with movie stars, or give their constituents a chance to glimpse a movie set from behind police barricades, is just one of those vote-gathering perks politicians love, as long as no one notices that they are achieving this result by taxing the many to give to the few.

  Meanwhile, Wisconsin is so broke it fired some of its state corporate tax auditors, even though they bring in far more money than their salaries cost. But of course it is always easier to give money away than to collect it. And what glamour is there in auditing corporations to make sure they pay their required taxes compared to politicians getting to crow to voters that they brought Johnny Depp to town?

  Louisiana and Pennsylvania are among the states that have relied on a firm called Economic Research Associates to justify these Hollywood welfare programs. News reports routinely described these reports as audits or studies, implying that they are neutral searches for fact and truth. The missing descriptive words for these reports are “bought and paid for” and “superficial.”

  When a paying client asks, Economic Research Associates turns out “studies” that sell the absurd as fact. One such paper claimed that a nearly dead mall in Irondequoit, New York, part of whose market area is Lake Ontario, could grow sales fourteen fold from $30 million to $450 million annually. Never mind that the mall was in a county where population has been flat for decades and retail sales falling. Never mind that in the previous ten years total annual wages, adjusted for inflation, have fallen by $660 million. Never mind that the study was paid for by a developer seeking more than $250 million of taxpayer gifts, welfare he asked for while making campaign contributions to local politicians who were in a position to arrange these gifts. Never mind little details like facts and sense.

  I got this study when I asked officials in surrounding Monroe County to show me their due diligence on the proposed subsidy for the dying mall. It turned out they had not one sheet of paper representing any independent inquiry to determine facts before spending money. All the officials could produce was the fantasy report by the developer hoping to pocket millions of taxpayer dollars. Reports by Economic Research Associates and other firms who get paid by those with their hands out for subtle giveaways of your tax dollars, or credits to escape taxes, should be greeted with public laughter as fairy tales for the greedy.

  So just how many jobs were created in Michigan with its $48 million of tax welfare to Hollywood? The moviemakers employed nearly 2,800 people, the Michigan State University researchers reported. Some politicians trumpe
ted this single fact as proof that the tax credit works. But the fine print revealed that the typical “job” lasted just twenty-three days. Turn that into years of labor, and the 2,800 jobs become the equivalent of 254 full-time jobs, though such temporary employment hardly compares with steady work. Divide the $48 million giveaway by those 254 jobs and the cost to Michigan taxpayers for each came to $189,000.

  For context, consider that in 2007, when most families had two breadwinners, the average American household earned $48,000 in wages. The average Michigan household did not fare as well, earning just $44,000, federal and state tax reports show. So those 254 Hollywood jobs cost taxpayers nearly five times the wages earned by the typical Michigan household.

  The good news is that this welfare for Hollywood only cost the average Michigan household $12. The bad news is that state political leaders are planning on increasing their giveaways to Hollywood in the years ahead. They would never say it this way, but what they plan is to take more money from the below-average-income earners of Michigan to give to the far-above-average income people of Hollywood. This is income redistribution, not downward to relieve the poor, the disabled, the sick, but upward to help the already rich.

  As with Wisconsin, the numbers show that Michigan politicians who voted for these laws flunked elementary-school arithmetic. But this story is a two-reeler and the second reel is even richer for Hollywood than the first.

  TAX CREDITS FOR SALE

  Michigan lawmakers were careful to make sure that Hollywood would get the full benefit of these tax breaks even if the studio did not owe any Michigan taxes. How? Technically, what Michigan gives Hollywood is a tax credit. That is a dollar-for-dollar reduction in state corporate taxes. If the film company does not make any profit in Michigan, it has no use for tax credits since it owes no taxes. On the surface, a tax credit would be worthless. But just as in Wisconsin, if the film company does not owe any taxes to Michigan, the state just writes the company a check.