A gift, from NY to Abu Dhabi

By David Cay Johnston
November 1, 2011

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.

3 comments

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No comments on this one ayy?

Posted by tmc | Report as abusive

@tmc: what else is there to say? The article speaks for itself.

Posted by matthewslyman | Report as abusive

The article is too complicated for most readers to latch onto and make their own remarks. In general, unless its a pop-culture piece or clear cut emotional article you won’t see much discussion.

Posted by djlowballer | Report as abusive