The Fine Print: How Big Companies Use Plain English to Rob You Blind
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You read that right. Many employers in nineteen states can now keep state income taxes withheld from paychecks. General Electric, Goldman Sachs and Procter & Gamble have these deals, along with a host of foreign firms from the German computer maker Siemens to the Swedish appliance maker Electrolux and a host of Canadian, European and Japanese banks. In all more than 2,700 companies get to pocket the state income taxes withheld from some of their workers’ paychecks.
In Illinois, for example, six big companies made deals with the state to pocket half or all of the state income taxes paid by their workers over ten years. Ford got a deal in 2007 by threatening to close an automobile assembly plant. In 2009, when the economy was in the worst shape in eight decades, Chrysler and Mitsubishi used threats of assembly plant closings to get similar deals.
In 2011, three more companies threatened to move out of Illinois. The state paid them off by letting them keep all the taxes withheld from their workers’ paychecks for ten years. The German tire maker Continental will pocket $22 million of its workers’ taxes, about a tenth of what it invested to modernize a tire plant in poverty-stricken southern Illinois, retaining 2,500 jobs and creating 444 more. Navistar, maker of big diesel trucks for industry and the military, threatened to go to Alabama or maybe Iowa. In return for staying put, Navistar will pocket almost $65 million.
The big winner, though, was Motorola Mobility, the cell phone maker. Just for promising not to move out of state and take three thousand jobs with it, Motorola gets to siphon $136 million from the paychecks of its well-paid high-tech workers. As if to make this transaction all the more interesting, Motorola Mobility agreed to be acquired by Google soon after the state made the big tax deal. The Motorola board then paid its CEO, Sanjay Jha, to go away. He received $66 million. Thus, Illinois taxpayers underwrote his golden parachute, which amounted to roughly half the value of the worker taxes flowing to Google.
Google hardly needs a subsidy from Illinois taxpayers. It dominates the worldwide search engine and advertising business. Its founders, Larry Page and Sergey Brin, are each worth more than $15 billion. Monopoly profits are the key to such fortunes and oversize toys: at a Capitol Hill hearing in September 2011, Senator Herb Kohl of Wisconsin asked if Google was effectively a monopoly and Eric Schmidt, Google’s CEO, acknowledged, “We’re in that area.”
If you work for one of the above companies in Illinois, you probably have not heard that your employer is keeping the state taxes taken out of your check. The diversion is stealthy by design. No law requires the companies to notify the workers that state income taxes are being diverted. The state treats you as having paid your taxes even though it never got the money.
The few news reports about these deals, most of them scanty and vague, often characterize this pilfering of worker taxes as a public benefit that creates or saves jobs. The reality is that companies getting such benefits can actually negotiate to destroy jobs, as Navistar did. It can fire up to 900 of its 3,100 headquarters workers and still keep the taxes its remaining workers pay.
What economic argument justifies letting companies take taxes withheld from paychecks, much less companies that plan mass layoffs? In return for pocketing the taxes the companies agreed not to destroy even more jobs. Think of it as antipink slip blackmail. And like most blackmail arrangements, you never hear about them even when they happen in your neighborhood.
Warren Ribley, the director of the Illinois Department of Commerce and Economic Opportunity, told me “it’s a fair question” as to whether taxpayers should be subsidizing businesses. But he said that was the duty of elected leaders, and that the public should debate the issue; assessing the pros and cons was not part of his job description.
“In the meantime,” Ribley said, “I am out there competing every single day with states and countries across the entire globe. I have got to have the tools and I have to use the tools provided by the General Assembly,” as the Illinois legislature is formally known.
State representative Jack Franks, a Democrat from the northern end of Illinois, said the deals “are fundamentally unfair” to taxpayers and other companies. He pushed to get copies of the contracts, which Ribley’s office eventually turned over. Once Franks read the contracts he became incensed. He realized that some of the six companies made deals allowing them to fire workers en masse and yet pocket tax dollars. “Our current governor,” he said, referring to fellow Democrat Pat Quinn, “had the genius idea of giving to Motorola and Navistar and others…yet he is allowing Navistar to fire up to twenty-five percent of their workforce and still get millions from the state” by pocketing taxes withheld from their workers’ paychecks. “People should be outraged,” he said.
Why would states do this? The answer is that this is the only remaining way to funnel taxpayer money to big companies without writing them checks. The biggest companies already pay little or no state income tax, thanks to friendly legislators ever grateful for campaign contributions. In Connecticut, home to about forty companies with a billion dollars or more of annual revenue (among them General Electric), only one large company paid more than a million dollars in state corporate income tax in 2003, the latest year for which the state has released such data. In Wisconsin, multibillion-dollar giants like the family-owned company SC Johnson, maker of Raid bug spray and Ziploc bags, have not paid Wisconsin income taxes in years. We know that because of an unusual Wisconsin law that, for a $4 fee, permits any state resident to get a report that discloses how much tax a corporation paid the state.
This is, of course, perfectly legal. Legislatures pass laws that let national and multinational companies pay, through a host of techniques, little or no state income tax. One of the most common is the same technique used by multinational companies to convert profits earned in America into tax-deductible expenses.
Here is how it works. A company sets up a subsidiary in a tax-free jurisdiction, nothing more than a corporate shell in, say, the Cayman Islands for a multinational or in Delaware for a domestic company. This shell then owns the parent company’s patents, copyrights, brand names, logos and other intellectual property. The shell company charges royalties for the use of the intellectual property it owns. Those royalties are tax-deductible expenses at one end and untaxed profits at the other.
Another shell company acts as an internal bank. Each day all the revenue taken in at stores or factories is paid to the shell company, which then lends back whatever cash is needed at a stiff interest rate. The factory or store, burdened with debt, earns little or no profit for tax purposes, while the profits accumulate in a different jurisdiction, where they may be lightly taxed or not taxed at all.
Then there are excise and property taxes. State economic development agencies, together with local governments, routinely wipe out these levies. In Delaware, companies can get a refund on half their utility taxes. Other states give companies “green” tax credits for using renewable energy or building in areas once abandoned because of toxic spills. In many states, companies can get refunds on any sales or excise taxes they paid.
Donald Trump began his career in the 1970s with a deal to rebuild the rundown Commodore Hotel over Grand Central Station in New York, remaking it into a Grand Hyatt. He got a twenty-year property tax abatement and said his only mistake was not asking for forty. That seemed preposterous to some at the time. Now it seems prescient.
Deals to wipe out all property taxes for half a century are now common—not for your home, of course, but for property owned by big companies. Verizon, the biggest company in the immensely profitable telecommunications oligopoly, made such a deal in Lockport, New York. The deal was worth $611 million, a tax giveback in return for about 200 jobs. That’s $3 million per job. Invest that amount at 5 percent and you get $150,000 annually. The Verizon jobs were going to pay at most $85,000, with many under $50,000. Yahoo made a similar deal in the same town for 125 jobs, but its subsidy was only $2.1 million per job. Still, those jobs were also worth less than the interest on the subsidy.
So many states have tax credits and giveaways that chronicling them supports a publication called Tax Incentives Alert that reports every bit of the fine print, together with articles critical of any reductions in these gifts, showing an especially vigorous entitlement philosophy. It provides real and useful news for those who make money off taxes, not those who pay taxes. The monthly publication costs $517 a year for both print and electronic versions, but you can save $40 by taking one or the other.
Even the myriad abatements, credits and outright gifts detailed in Tax Incentives Alert are not always enough to wipe out taxable profits at prosperous firms. Luckily for these companies, the politicians they help keep in office have another technique to help corporations escape taxation: laying off state tax auditors. In many states, notably South Carolina and Wisconsin, governors slashed the number of corporate tax auditors, claiming the state could no longer afford them. It is a preposterous argument. These auditors routinely bring in many times their salaries, which would seem to argue for keeping them working.
Firing auditors makes as much sense as a hospital firing doctors; in a real sense, doctors are the source of a hospital’s patients and, like auditors, both amount to a sales force. But when politicians fire auditors, plenty of people cheer because their hatred of taxes or government overwhelms logic and reason. How many politicians have you heard saying we need more tax auditors? Would that change if we called them what they are—financial detectives?
At the federal level, the highest paid IRS corporate auditors, with years of experience and advanced degrees, make less than $75 an hour in pay and benefits. According to IRS data analyzed by the Transactional Records Access Clearinghouse at Syracuse University, each hour spent auditing the biggest companies produced an average of more than $9,300 of taxes owed. So firing one of these auditors saves taxpayers less than $150,000 annually while costing taxpayers more than $19 million annually in forgone tax revenue.
Once state politicians have enacted laws reducing or even wiping out income, sales, excise, utility, fuel and other miscellaneous taxes, the demands for more of the same continue. Remember the corporation is, by nature, amoral, immortal and entirely money motivated; that means the corporation is so constituted as to do anything and everything lawful to get more money. Pocketing tax dollars is an easy source of profits.
“Profits” is the right word here because no product or service is produced in return for these payments. And the companies bear no expense that they would not face without the giveaways. Taxes siphoned from workers drop right to the bottom line. Some consultants, according to Tax Incentives Alert, charge companies 30 percent of the take to shepherd tax giveaways through the process, presumably on small-bore deals. But on huge multimillion-dollar deals like the ones in Illinois, the rules are not that complicated and each of the companies already has experts on staff to fill out the relatively minimal paperwork.
These laws were passed with so little attention, some of them going back two decades, that I was unaware of them until the summer of 2011. David Brunori, a prominent authority on state taxes as the executive editor of the weekly state, federal and international Tax Notes magazines, was also in the dark. So were several tax law and accounting professors I contacted. The story was not entirely untold, however. Once I knew about these diversions I started searching the news clips. I found little items here and there, often on the inside back pages or, if prominently played, topped by vague and celebratory headlines along the lines of “Jobs Saved Thanks to State Senator So-and-So.” D-list celebrities get more coverage with more telling details.
Now the essential underlying question here is: How probable was it in the first place that these companies would close up shop and move across state lines? Under Illinois Public Act 97-2, the justification for such tax deals is a “credible” threat that a company will leave the state. But would these companies really go, abandoning their existing investment and disrupting their operations? And furthermore, does it make sense to institutionalize threats to leave a state as the legal basis for getting tax dollars?
Motorola has three thousand highly paid workers around Schaumburg, a quick drive from the cultural amenities of Chicago. Their skills are not easily replaced. It is unlikely many of them are eager to give up their suburban enclave with easy access to museums, theater and big-time sports teams to live out their lives in, say, rural Iowa or Alabama. Moving them, especially if the company offered to pay their entire household moving costs, would impose huge costs on the company, as well as disruptions to its business. By staying put not only are these costs and disruptions avoided, but, when the current deal ends in 2021, the company can renew the flow of tax dollars by threatening—in a “credible” way, of course—to move its operations to another state.
The fine print protects.
23…
Of Commas and Character
Be more concerned with your character than your reputation, because your character is what you really are, while your reputation is merely what others think you are.
—John Wooden, former UCLA basketball coach
23. By now your blood may be boiling at the conduct laid bare in these pages, but what you have read is not the half of it. Researching this book for more than four years has opened my eyes to still more abuses beyond the scope of this book, which is the third volume in my series examining the American economy, following Perfectly Legal (the subject was taxes) and Free Lunch (subsidies).
To despair and think the economy is doomed, however, would be a mistake. We can recover from the trend of permitting big business to use our government as a shield from the economic discipline of competition. We need not sink further into debt as individuals or as a nation. We do not have to fall further behind our competitors, and we do not have to endure a government that is hostile to the well-being of the vast majority. We can end the privatized system of wealth and income redistribution that uses monopolies and oligopolies to take from the many to unjustly enrich the politically connected few. We can reduce cronyism and promote success based on merit.
Yet to return to the best path to prosperity and stability, we must recognize the deep forces at work that brought about our economic woes. The core problem is with oligopolies and monopolies and their excessive prices, lower quality services and reduced innovation. They are the principal means, enabled by government, to redistribute income and wealth from the many to the politically connected few.
Solving problems usually begins with acknowledging them, so let’s look at our most fundamental problem, a school of economic philosophy that has become the accepted truth, or rather dogma that is now treated as truth. Let me explain.
NEOCLASSICAL ECONOMICS, CHICAGO STYLE
The dogma is neoclassical economics, which, despite what we’ve been told, is but one way to view the production and distribution of goods and services (and, as our present circumstances demonstrate, is a highly imperfect way of doing so). The sect that promotes the dominant antitax, “deregulation” worship of this false god is the Chicago School, which assumes good behavior by people and has unquestioned faith in markets to correct themselves without any interference by government.
On paper, everything works out in neoclassical economics. In the real world, however, leaders face a less-than-ideal environment, and they must manage and compete against firms run by charlatans, incompetents and crooks, some of them aided by dishonest accounting schemes.
To the Chicago School, whose adherents seem to sit at every lever of power in Washington, regulation is regarded as a drag on the economy. The damage done by the poseurs and thieves, we are told, are anomalies that should not shape policy. One of the Chicago School’s most influential figures, chief judge Frank Easterbrook of the Seventh Circuit Court of Appeals in Chicago, does not even believe in fraud laws for securities markets. (Tell that to all of the people whose savings were wiped out by the parade of
accounting scandals at MCI and Enron and by the derivatives sold on Wall Street, which brought the whole economy down in 2008. The damage from those and other like events may linger for a decade or more.)
The dominant law and economics text on corporate law has for years been one by Easterbrook and Daniel Fischel, who was for a time dean of the University of Chicago’s law school. They assert that “a rule against fraud is not an essential or even necessarily an important ingredient of securities markets.” Their book was written after Professor Fischel worked as a consultant to three of the people at the top of America’s most notorious corporate control frauds, corporations, including Enron; Charles Keating’s corrupt Lincoln savings and loan empire; and Centrust, the crooked Miami banking firm. Fischel also maintains that junk bond financier Michael Milken should not have gone to prison for securities fraud. That these and other cases tested their theories—and found that they failed catastrophically in the real world—has not changed the opinions of Judge Easterbrook or Fischel. Their destructive ideas should be swept into the dustbin of history.
To assume that bad behavior does not exist or is anomalous is sheer folly. But that assumption underlies neoclassical economics and the push for “deregulation,” or so-called deregulation, since the changes tend toward new rules that wipe out protections for the powerless.
Judge Easterbrook and others who share his view are, ultimately, correct that markets can be self-correcting. But how much damage will it take for self-correction to work? Should the entire economy collapse? Or would smart regulation based on principles that date to the Code of Hammurabi serve us better than the wishful thinking of the likes of Easterbrook and Fischel? Rules have long existed to rein in bad behavior through penalties and other remedies for misconduct. We also need them to promote good conduct, fair play and reasonable pricing while providing penalties and other remedies for misconduct. We don’t need more of the massive securities and accounting frauds that occur when rules are dismantled.