David Cay Johnston

By David Cay Johnston
The opinions expressed are his own.

Taxpayers can expect ever more picking of their pockets by businesses with political clout thanks to the Nov. 21 decision by Judge Theodore Jones and four colleagues on the New York Court of Appeals.

At issue is $1.4 billion in state gifts whose primary beneficiary is a microchip maker, GlobalFoundries, a company controlled by Abu Dhabi’s hereditary ruler, Sheikh Khalifa bin Zayed Al Nahyan, one of the wealthiest people ever. The gifts, labeled economic development grants and made through a state-sponsored corporation, work out to about a million dollar subsidy per job at the plant near Albany.

The New York Court of Appeals said the 50 taxpayers who sued over the deal and over gifts to apple and wine trade associations have no standing to challenge the gift because it is proper.

While this case concerns only New York, it illustrates how corporate socialism has become our de facto economic policy and how the ideal of competitive markets and self-reliance are fading in significance.

State and local gifts to corporations now run at least $70 billion per year nationwide, according to an estimate by Professor Kenneth Thomas of the University of Missouri-St. Louis.

I think Thomas’s estimate is conservative, in good part because many states and local governments make spotty disclosures or low-ball figures.

DISTORTED MARKETS

Not only do these gifts distort markets, they also destroy many entrepreneurial businesses and help a relatively few giant companies with influence earn profits using taxpayer capital.

GlobalFoundries says that upstate New York is a costly place to do business and that, but for the subsidy to offset these higher costs, it would have built the plant elsewhere.

The New York ruling makes future challenges of corporate gifts virtually impossible. The court decided that before having any opportunity to compel testimony or disclosure of documents, plaintiffs must prove a gift is unconstitutional using the standard of proof in criminal cases: beyond reasonable doubt.

Any gift to the sheikh’s company seems clearly at odds with Article VII, Section 8 of the state constitution, which states that “the money of the state shall not be given or loaned to or in aid of any private corporation or association, or private undertaking; nor shall the credit of the state be given or loaned to or in aid of any individual, or public or private corporation or association, or private undertaking.”

New York voters prohibited gifts to companies in the 1846 state constitution. The ban came after failed railroad and canal companies stuck taxpayers with their obligations in the 1830s, which accounted for about 60 percent of the state’s debts back then.

And it’s not as if voters said no just once. They affirmed the ban, and strengthened it, in 1874 and again in 1938. Voters were savvy enough to see through a slyly worded proposal to undo the ban on gifts, voting it down in 1967.

So how did Judge Jones, who wrote the decision, along with Chief Judge Jonathan Lippman and Judges Carmen Beauchamp Ciparick, Victoria A. Graffeo and Susan Phillips get around the voters saying no, no, no and no?

They ruled that while the state “may not lend its credit to a public corporation,” nothing “prohibits the State from adopting appropriations directed to” intermediaries who can then give the money, or credit, to private corporations.

A MOCKERY

That’s absurd. To suggest that what the state cannot do directly it can do by passing the money through a separate corporation it created is to make a mockery of the state constitution. Applying the same standard in criminal law would mean that crime family bosses and drug kingpins could escape prosecution by having subordinates do the dirty work.

In a dissent, Judge Eugene Pigott meticulously deconstructed the errors of logic and willful blindness of the majority. He quoted the great jurist Benjamin Cardozo in a case declaring that gifts to World War One veterans violated the gift clause.

Judge Cardozo wanted to allow the gifts to soldiers, writing that the gift ban was not intended to prevent recognizing honorable service to country, but “to put an end to the use of credit of the state in fostering the growth of private enterprise and business.”

Judge Pigott said he was unimpressed by the majority argument that corporate gifts have a long history. “Unconstitutional acts do not become constitutional by virtue of repetition, custom or passage of time,” he wrote. Amen.

Judge Robert S. Smith heartily endorsed Pigott’s dissent and wrote his own.

The New York Legislature, Judge Smith wrote, “is free to disregard both received economic teachings and common sense … But when our Legislature commits the precise folly that a provision of our Constitution was written to prevent, and this Court responds by judicially repealing the constitutional provision, I think I am entitled to be annoyed.”

Taxpayers deserve to be more than annoyed at judges who concoct arguments to justify taking from all to give to the select few, in this case to the fabulously wealthy ruler of Abu Dhabi, who hardly needs a subsidy. All voters can do is hope that one day judges who are not in the thrall of corporate interests will put the public interest, and the plain language of the state constitution, first.

Photo: A handout picture from Emirates News Agency WAM shows Emirati President Sheikh Khalifa bin Zayed bin Sultan al-Nahyan (R) greeting Omani sultan Qaboos bin Said in Abu Dhabi July 11, 2011. REUTERS/WAM/Handout

The author is a Reuters columnist. The opinions expressed are his own.

KANSAS CITY, Mo. –  The U.S. politician-businessman that Congress put in charge of determining the reasons for the 2008 financial crisis has a sobering message for us: “It’s going to happen again.”

Phil Angelides, the real estate developer and former California state treasurer who chaired the Financial Crisis Inquiry Commission, said on Friday that “all across the marketplace the warning signs were there” of a coming disaster but the mechanisms and political will to stop it were not.

He and I both spoke at a University of Missouri-Kansas City Law School symposium on the financial crisis and the commission set up to examine it.

Angelides warned of a recurring economic nightmare unless Congress and the next president start paying attention to the facts and stop listening to the people who caused, profited from or failed to detect the crisis.

While Wall Street and laissez faire Republicans have attacked the commission’s final report — all 22 footnoted chapters of it — Angelides boasted that not one fact had been proven wrong.

Statements from the leading Republican presidential candidates, as well as the tepid actions of President Barack Obama, show an active interest not in fixing the problems, but rather in enabling Wall Street to go on doing business pretty much as it chooses.

SQUELCHED OR IGNORED

For months now, a canard has gained popular currency through mere repetition: no one could have seen the meltdown coming.

The commission’s report shows that a number of people did see what was coming but they were squelched or ignored. Clear back in 1998, four months before the Long-Term Capital Management collapse, Brooksley Born, then chairwoman of the Commodity Futures Trading Commission, wrote a paper predicting that disaster would flow from the unregulated sale of derivatives. Congress responded by making sure derivatives were not regulated.

Then there were the internal reports at failed mortgage banker Countrywide Financial, which warned there was little-to-no hope that many borrowers would ever repay. Freddie Mac and Fannie Mae tried to resist these shaky mortgages, but they had to keep taking them after Countrywide founder Angelo Mozilo applied political pressure.

In early 2004, after detecting a mortgage bubble in the data, I wrote two pieces for the New York Times warning of the problems. If a mere journalist who was not even reporting on real estate could discern the problem, what excuse was there for those whose job it was to monitor the situation?

Wendy Edelberg, who was the commission’s executive director, said on Friday that “while you can never predict all panics, the flip side is this crisis was caused by human actions and was avoidable.”

She showed with hard numbers that, contrary to the nonsense being peddled by Wall Street and the politicians it finances, the meltdown was a Wall Street creation.

Edelberg presented charts showing that loan delinquencies “were lower by an order of magnitude” for government-sponsored Fannie and Freddie than for Wall Street’s mortgage-backed securities. Delinquencies at one point were 15 percent for Fannie and Freddie versus 40 percent for Wall Street.

Edelberg also outlined who bought the obviously bad loans. No one did.

She compared the bad loans to soup with so much fat no one wants it, so it is put in the refrigerator. Once the mixture chills the fat rises to the top and is skimmed off.

EXCESS FAT

By 2006 more than 80 percent of the sure-to-fail loans were inside collateralized debt obligations that were being repackaged and resold like so much excess fat. “No one was actually buying the risk,” she said. “It was just being recycled.”

This is exactly what Washington politicians in both political parties, with their eye on donations from Wall Street, do not want to hear.

One of the best proofs of official lack of interest in learning the facts is the size of the commission budget Congress authorized: $9.8 million.

That is a tiny fraction of the $175 million spent investigating the Space Shuttle Challenger disaster in 1986, and that was in 1980s dollars. It is less than a quarter of what Kenneth Starr spent investigating President Bill Clinton‘s dalliance with an intern.

And then there is the official hostility to the commission. When the report was issued in January, Representative Darrell Issa, a California Republican and one of the richest self-made men in Congress, mounted an investigation.

Angelides characterized the move as a search for just one email showing the inquiry was motivated by ideology rather than truth-seeking. Issa came up dry, but his message was loud and clear: don’t mess with Wall Street.

What the commission’s report has shown is that leaving Wall Street alone will ensure a future of continuing panics, to the detriment of everyone who is not part of Wall Street.

By David Cay Johnston

The views expressed are his own.

In a competitive market, economists argue endlessly about who bears the burden of corporate income tax. Is it owners, who get a smaller net return? Or workers, who make less? Or suppliers, who get lower prices? Or customers, who pay higher prices?

In one sector of the U.S. economy, however, the answer is clear-cut. Corporate-owned utilities (mostly electric and natural gas) and pipeline partnerships, all of them legal monopolies, pass their income tax burdens on to customers.

Now a study, released last week, provides powerful new evidence that these two industries convert corporate income taxes from a burden to a benefit.

The study was prepared by Citizens for Tax Justice and the Institute on Taxation and Economic Policy. Both are foundation-backed nonprofits that say the tax system favors the rich and corporations over most Americans.

Utilities charge prices, known as rates, set by political appointees who regulate the industry. Embedded in those rates are generous sums to cover corporate income and all other taxes. Pacific Gas & Electric, the northern California utility, was awarded $431 million to pay 2007 corporate income taxes, a final decision by the California Public Utilities Commission shows. Similar amounts were approved, or are in the process of final approval, for each subsequent year.

But in the three years from 2008 through 2010, PG&E’s corporate parent did not pay roughly $1.7 billion in federal income taxes on $4.8 billion of profits, the expected sum based on the federal 35 percent corporate income tax rate. Instead, PG&E collected more than $1 billion in refunds, thanks in good part to a 2008 increase in accelerated depreciation, which lets companies defer taxes into the future, the study showed.

Brian Hertzog, PG&E’s Washington director of corporate relations, said that the rules that let the company defer paying taxes into the future mean it can use that money immediately to help pay for new plant and equipment. He said this costs much less than borrowing in the markets and thus benefits customers.

Hertzog has a point. When customers pay their monthly bills they loan money to PG&E at zero interest, which is a lot cheaper than borrowing in the markets.  But that is neither capitalism nor market economics.

The market chooses to invest and sets a price for credit. The regulatory and tax systems force captive customers to make interest-free loans to utilities, denying the customers the use of their money for other purposes, including paying down their own debt, which may be at much higher interest rates than the savings from using that money to finance utility projects.

Forcing captive customers to extend interest-free credit to utilities strikes me as a subtle form of legalized theft.

PG&E’s roughly $2.7 billion swing from burden to benefit is not unique. The 26 large utilities studied paid an average rate of just 3.7 percent over the three years, a 10th of the 35 percent statutory U.S. tax rate. Half of the 26 corporate-owned utilities analyzed got money back from the government, thanks to deferrals and tax benefits from tax shelters in non-utility operations. Just four paid corporate income tax of more than 10 percent.

The trophy for turning the burden of taxes into a benefit goes not to General Electric, whose skillful use of tax law and lobbying for tax breaks is famous, but to Pepco Holdings, which owns the monopoly electric utility in and around the U.S. capital. Pepco’s three-year tax rate? Minus 57.6 percent. GE’s was only minus 45.3 percent.  Pepco says it pays all of its taxes as required by law. For sure that’s true.

Here’s the irony. Pepco’s biggest customer, by far, is the federal government. So, federal taxpayers and other customers paid electric rates to Pepco that assumed about $309 million in corporate tax payments would flow to the Treasury, only to see $508 million of their taxes flow to Pepco as refunds. Ouch.

The roughly $817 million tax benefit Pepco enjoyed — from taxes it collected but did not turn over combined with refunds — almost equaled the $882 million in profits Pepco’s corporate parent reported during the same period.

This is an old story at Pepco Holdings. In the six years preceding the study, 2002 through 2007, Pepco Holdings reported pretax profits of $949.2 million. Its cash paid for taxes was negative $116.4 million, my analysis shows. Cash paid for income taxes is a simpler measure than the painstakingly detailed examination in the Citizens for Tax Justice study. Cash paid also tends to understate reality.

Pipelines have an even juicier deal. Under the 1986 Tax Reform Act they are exempt from paying corporate income taxes if organized as partnerships. However, under a rule from the era of President George W. Bush, federal regulators let them collect the corporate income tax anyway. That IS legalized theft.

How do utilities and pipelines convert the burden of corporate income taxes into a benefit, whether temporary or permanent? Easy as 1, 2, 3.

1. Political appointees on regulatory boards, many of whom come from and return to the utility and pipeline industries, require customers to pay the utilities’ corporate income taxes measured as if the utilities were stand-alone companies filing their own tax returns.
2. Most utilities do not stand alone, but are subsidiaries of holding companies.
3. Each holding company files a tax return that consolidates its utility and non-utility businesses, allowing it to capture some of the utility taxes as additional assets or as profits.

The result is little or none of the tax that customers are forced to pay actually gets to government.

Here are two questions to ask about this costly state of affairs: Why have you not heard about this from anti-tax politicians and organizations that insist they are trying to ease your burdens? Who will put an end to this forced transfer of wealth from utility and pipeline customers to the companies’ shareholders?

The author is a Reuters columnist. The opinions expressed are his own.

How does being taxed to give money to the oil-rich kingdom of Abu Dhabi and its hereditary ruler strike you?

The cost, if you live in New York State, comes to about $1.4 billion, or roughly $190 per household, for an economic development deal with a privately held company called GlobalFoundries to build a microchip plant near Albany.

As you ponder this forced transfer from you to the chip-making giant, which is controlled by Abu Dhabi‘s ruler Sheikh Khalifa bin Zayed Al Nahyan, keep in mind that Abu Dhabi says its citizens enjoy the world’s third-highest per capita income, a third higher than Americans’.

The deal for the chip plant is being challenged in court by a long-time critic of “corporate welfare” in a case that will test New York‘s long-standing policy of subsidizing business.

At issue is the state constitution’s Article VII, Section 8, which says, “The money of the state shall not be given or loaned to or in aid of any private corporation or association, or private undertaking …”

Voters enacted this ban on gifts of cash and credit to corporations in 1846 after taxpayers got stuck with debts from giveaways to railroads, the high tech industry of that era.

To me, the constitutional language raises a question: How can New York State be forcing its citizens to make this gift and hundreds of other smaller corporate gifts all across New York?

The state, technology giant IBM, and GlobalFoundries have all asked New York‘s highest court to prevent that question being raised in a trial.

They want a ruling that upholds a lower judge’s dismissal of a lawsuit brought by Buffalo lawyer James Ostrowski, who is challenging the GlobalFoundries deal as unconstitutional.

LIBERTARIAN CRITIC

Ostrowski, a longtime libertarian critic of corporate subsidies, sees such gifts as a way that politically connected business leaders funnel taxpayer money to one another while avoiding the competitive market and making everyone else worse off, including those out of favor with the powers that be.

Advocates of state economic development grants, including GlobalFoundries‘ spokesman Travis Bullard, say state financial support is vital to overcoming the high cost of doing business in the Empire State and creating new jobs.

The problem is that such gifts relieve pressure for actual reform and instead reinforce the system of taking from the many to benefit the few. The issue needs a full airing in court, which would expose tricks used to get around the constitution.

An Oct. 13 hearing in Albany focused on whether the case could be dismissed without a trial. A full airing at trial would resolve the gift issue and would also help people understand how much of their financial plight is due to market capitalism being supplanted by corporate socialism.

State and local governments forced residents nationwide to give corporations $70 billion last year in cash, tax favors and cheap credit, according to Professor Kenneth Thomas, a University of Missouri-St. Louis political scientist and author of Investment Incentives and the Global Competition for Capital.

That works out to about $600 per household. The $70 billion estimate does not include federal giveaways, which enjoy broad bipartisan support and on which the federal government provides, like state and local governments, only skimpy data.

COURTROOM DRAMA

At the Oct. 13 hearing in Albany, Barbara Underwood, state solicitor general, had barely started her argument when she came under withering questioning from Judge Robert Smith.

Underwood asserted that the $1.4 billion “can’t be a prohibited gift of state money” because the state passed it through an intermediary economic development agency. She also characterized such money as “a grant or contract — money paid for services.”

Underwood, evidently, thinks just being in business in New York is a service.

Judge Smith interrupted, saying it seemed like an evasion to let the state hand money to an intermediary which then made a gift the state cannot make directly.

Underwood argued the high court has let public authorities give money and extend credit to corporations for decades.

Judge Smith went to the core flaw in Underwood’s argument, asking whether prohibited conduct is acceptable “as long as you have been doing it a long time and you are the state?”

Chief Judge Jonathan Lippman followed up, asking “where is the line? Is the line just, we have been doing this a long time and it’s good for the state to be able to do this to promote economic development?”

Referring to previous cases about the gifts ban, Underwood said that then, as now with GlobalFoundries, the state was not giving money away but rather making grants that were lawful because they were “going to promote the New York economy.”

OK, Ms. Underwood, you sold me with that one.

Now how about a million dollar gift to me and each of my New York readers? After all, our use of that money would also promote the New York economy.