In New York, gifts circumvent a ban

By David Cay Johnston
November 29, 2011

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

2 comments

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Excellent, thanks from your students at UMSL!

Posted by UMSLstudent | Report as abusive

> “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.”

In other words, New York State’s subsidy to GlobalFoundries stole profitable business from some other place, and furthermore if the plant wouldn’t have been profitable without the subsidy, the subsidy brought unprofitable business into New York State! According to the obvious conclusions of GlobalFoundries argument, this is a lose-lose situation for New York and for everyone else!

What else is the “free market” good for, if not for directing work, goods and services to the places where it’s most profitable?

There’s a very strong smell of something else going on behind the scenes in this judgement. Could it be something to do with the need to keep Gulf-of-Hormuz states on-side for any potential conflict with Iran, by giving them a financial interest in America, and in New York specifically?

Posted by matthewslyman | Report as abusive