Taxed by the boss

By David Cay Johnston
April 12, 2012

Across the United States more than 2,700 companies are collecting state income taxes from hundreds of thousands of workers – and are keeping the money with the states’ approval, says an eye-opening report published on Thursday.

The report from Good Jobs First, a nonprofit taxpayer watchdog organization funded by Ford, Surdna and other major foundations, identifies 16 states that let companies divert some or all of the state income taxes deducted from workers’ paychecks. None of the states requires notifying the workers, whose withholdings are treated as taxes they paid.

General Electric, Goldman Sachs, Procter & Gamble, Chrysler, Ford, General Motors and AMC Theatres enjoy deals to keep state taxes deducted from their workers’ paychecks, the report shows. Foreign companies also enjoy such arrangements, including Electrolux, Nissan, Toyota and a host of Canadian, Japanese and European banks, Good Jobs First says.

Why do state governments do this? Public records show that large companies often pay little or no state income tax in states where they have large operations, as this column has documented. Some companies get discounts on property, sales and other taxes. So how to provide even more subsidies without writing a check? Simple. Let corporations keep the state income taxes deducted from their workers’ paychecks for up to 25 years.

It was not always this way. Letting companies keep their workers’ state taxes apparently began in Kentucky two decades ago as a way to retain jobs.

Last July when I wrote about six big companies that pocket Illinois state taxes I knew there was more to this. But I had no idea how pervasive these diversions were until I read an advance copy of the 39-page report by Good Jobs First.

CORPORATE SOCIALISM

Deals cut with the states over the past two decades diverted $5.5 billion from public purposes to private gain, the report says. Close to $700 million more was diverted last year, Good Jobs First estimates.

New Jersey approved $73.2 million in new deals in 2011 on top of $178 million diverted that year alone under previous deals. I calculate that at nearly $80 per household in corporate welfare based on New Jersey’s 3.1 million households.

These deals typify corporate socialism, in which business gains are privatized and costs socialized. They also mean government picks winners and losers, interfering with competitive markets. Leaders in both parties embrace these giveaways because they draw campaign donations from corporate interests and votes from people who do not understand that they are subsidizing huge companies.

Michael Press, a Connecticut consultant on tax incentives, says such deals, however troubling, are an inevitable result of the U.S. Constitution setting up competition between the states.

“In an ideal world we would not provide any corporate subsidies,” Press told me. “It looks like corruption. But if you do it right, if you only target those companies whose behavior you change to create jobs or keep jobs in your state then these targeted temporary arrangements are cheaper – much cheaper – and can be more effective than an overall reduction in tax rates.”

The mission of Good Jobs First is making economic development subsidies accountable and effective. In years of working with their data I have always found it sound. While Greg LeRoy, Good Jobs First’s founder, has rooted out all sorts of hidden subsidies over the years, he emphasizes that he is not inherently hostile to them, only to secrecy, waste and what he calls job piracy and job blackmail.

“Job piracy” occurs when one state diverts taxes to lure an employer across state lines. AMC Entertainmentannounced a deal last year to move its corporate headquarters from Kansas City, Mo., to a nearby Kansas suburb. In return, Good Jobs First said, Kansas will let the multiplex chain keep $47 million of state income taxes withheld from its workers’ paychecks, a drain on public finances that did not create any jobs, but does enrich the Wall Street firms that own AMC including arms of J. P. Morgan, Apollo Management, Bain Capital and the Carlyle Group. AMC declined to answer my questions.

“Job blackmail” occurs when a company threatens to close a plant unless it gets tax money.

In Illinois, the law requires companies to threaten to leave before they can keep taxes withheld from paychecks. Motorola Mobility, now being acquired by Google; the truck maker Navistar; the German manufacturer Continental Tire, and three auto makers – Chrysler, Ford and Mitsubishi – get to keep $346.8 in taxes over 10 years because they threatened to leave Illinois. Navistar can pocket $62.1 million even if it fires a quarter of its Illinois workforce, its contract shows. A recent deal gives Sears $150 million, Good Jobs First reported.

PROMISES OF JOBS

Promising to retain jobs can be lucrative. General Electric invested $126 million updating part of its Ohio operations. In return, GE gets a tax credit equal to $115.3 million of its worker taxes, recovering 92 percent of its investment. A sweet deal for GE, but not its competitors.

Gary Sheffer, GE’s top spokesman, said the company told its workers about the deal. In all, he said, GE is investing around $300 million in Ohio and “the resulting taxes the state will receive will far exceed the tax credits provided to GE.”

That response, I think, misses the point – GE should pay its own bills without taking welfare.

Many figures in the Good Jobs First report are from disclosure reports some states make. Others come from news accounts and company announcements.

Total revenue losses are higher than the report states. First, some states hide the costs. Phil Mattera, the research director at Good Jobs First, said he lists the cost as zero for states that hide the numbers.

Good Jobs First wants to end these diversions, but failing that recommends mandatory disclosure to the workers as the first reform. I concur. It’s the first step in ending corporate welfare as we know it.

33 comments

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The states that allow this and the companies that pocket state withholding taxes are engaged in subterfuge. They both know they could never put the arrangement on a ballot for popular approval. It treats the major companies as an arm of the government and they are actually larger than national governments and can muscle them too.

Both sides rely on the ignorance of the voters.

I recommend Lynne B. Sagalyn’s book “Times Square Roulette – Remaking the City Icon” MIT press, 2001, to see how hard headed they (especially the Disney people) can be. They’d promise anything to get the contract, but by the time the project was completed, most of those promises were forgotten and they achieved 99-year tax exemptions from the city.

They were so much like the gaming interests who very likely bribed their way into Atlantic City and made promises that they would boost employment for the locals and preserve some of the old landmarks. But once they started to dig in, they took over the city. They promised local employment but, as I understand it, couldn’t really use the population of the existing depressed area and brought in their own people for the most part. The owner of the Marlboro Blenheim – the icon of Atlantic City – sneakily blew it up one night to shorten delays and to avoid the costs of renovation of the HABS listed building. Actually I can see the necessity of demolishing the wood structure of the back part but the front was reinforced concrete that seemed only to need resurfacing and the repair of decorative details.

The city uses all the smarmy rhetoric it can to coax businesses back into the areas they want to stabilize and the Corporations milk the civic virtue aspects to the hilt and they know no one is going to look much or ever find out about how they are very eager to get into what they know will be prime areas.

AS I recall (it’s been ten years since I read it but I have the copy in front of me) that all the major corporate sponsors had originally agreed to provide improvements to the area subways stations but that those requirements were dropped along the way. The tax exemptions were expanded instead.

Once the city has started to demolish buildings and the sponsors start to build, they have even greater leverage with the city.

Few people may realize this and no one would notice it – but an entire theater was separated from its foundations and moved from the middle of a block to it’s present location further west on 42nd or 41st street. That may have been the largest building relocation project ever.

Isn’t a valid test of the veracity of the financial arrangements between city or state and big business: if they couldn’t explain the situation on the ballot, it’s probably not right even if it might be legal? It is a frightening way for big business to become almost an unaccountable government.

With very few exceptions, most private citizens are held to that standard. I don’t think many people like being “food for the Gods”. The big businesses are not without their vampire side too.

BTW – creative destruction was mentioned today in another article about Chinese small exporters. But creative destruction applies to the smaller firm, never the larger ones: except Lehman brothers.

Posted by paintcan | Report as abusive

Holy S#!t. And these are the same companies that are supporting candidates who scream about the evils of socialism!

Posted by majkmushrm | Report as abusive

This is the very definition of taxation without representation, a primary motivator for conducting the Revolutionary War. Why is it suddenly okay NOW? Where are all those car magnet patriots NOW? Why aren’t our modern day Tea Partiers protesting against THIS?

It’s bad enough that we aren’t being represented anymore in our State and Federal governments, but this doesn’t even have the illusion of being democratic.

Posted by flashrooster | Report as abusive

Is there a way to track where this money is spent? GE claims to have invested 300 million into Ohio, but it is absurd to say that when 115 million is kicked back to them.

If these companies get such tax breaks, why don’t they have money to hire more employees?

Where did this practice come from? Is this a result from all of the deregulation that started with President Regan?

No wonder the top one percent are raking in all this money while salaries remain stagnant.

Posted by CitizenCM | Report as abusive

How can this be true? If I’m a worker and have taxes deducted and at the end
of the year I file state returns and the state owes me money where does that money come from if my money has been “swindled” out of the kitty.

Posted by Hillbillyegghed | Report as abusive

Mussolini extolled the virtues of Corporatism. We are here. Equal protection under the law, as the fourteenth amendment to the US constitution promises does not seem to function. Some folks get a ‘home free’ card, while others get a ‘home lost’ card.

Actually though, the corporate form is not the real villain here, but the link between corporations-banks-lawmaking that juices this corrupt system that cannot hold its own weight. Ongoing undeclared wars. Bankers writing foreclosure laws. Bankers creating their own land base (MERS) to replace county record keeping. Judges proclaiming from the bench that money is speech. I can hear Nero fiddling.

As Dylan sang: Money does not talk, it swears. Happy Tax Day

Posted by TheOldSodbuster | Report as abusive

Isn’t there a federal issue here? As an employee, i deduct my state taxes from my income for federal taxes. If these taxes are not in fact being paid to the state, then they are not taxes, so in fact every employee of the companies quoted is violating federal tax legislation.

I would use this argument to force states and companies to declare this, raising the tax burden of their employees and increasing the profile of this corporate cronyism

Posted by GA_Chris | Report as abusive

Columnist here…

@ GA_Chris,
The state income taxes still qualify for federal income tax itemizers. How? The companies get a state tax credit equal to the state taxes withheld from worker paychecks.

This is as easy as, say, getting around the constitutional prohibition on gambling in Louisiana (the legislature just declares various games are not gambling) or the NY state prohibition against gifts of money to corporations (overwhelmingly approved by voters 3 times over more than 150 years) by just washing the gift through a state agency.

Posted by DavidCayJ | Report as abusive

It is interesting to note that this is not a partisan issue with many republican and democratic states on either side of this practice. Powerful interests are simply able to side-step paying their fair share with their threats and direct access to political favoritism. We have always known it, and exposing it just makes us more jaded when there is seemingly no way to combat it. This is just another example of how the 99% are subject to indentured servitude by the injustice of our system. Neither the Tea Party or the Occupy movement have a prayer against this practice especially after the power granted to the Corporation by the Supreme Court in Citizens United v. Federal Election Commission. Anyone have anything positive to counter this?

Posted by LEEDAP | Report as abusive

The Good Jobs First leaves out Oregon—make that 17 states “Paying Taxes to the Boss.” Oregion passed this giveaway in 2011 with SB219. For this biennium, there is a cap of $4 million. In Oregon’s case, the business gets a forgivable loan based on the anticipated taxes of hires of traded sector employees.

Because we’re a single sales factor state, many of our businesses pay no state income tax. With no taxes due, tax credits are worthless unless they are marketable, which has gotten bad press in Oregon. The clever bill ideas are now are grant and forgivable loan giveaways.

The bill can be found here: http://www.leg.state.or.us/11reg/measpdf  /sb0200.dir/sb0219.en.pdf

Posted by jodywiser | Report as abusive

The system is clearly wrong, in some degree. How can you have independent states implementing differing standards on corporate welfare, when corporations compete across state and international boundaries on both supply-side purchases and demand-side sales, and transport their goods across these boundaries with little or no import tariffs to resist this trade? It’s almost as bad as the European Union having fiscally independent states joined in a currency union.

GE’s “response” basically amounts to,
“Well, we’re still paying SOMETHING in tax!”

I tire of the politicians lies too, when they pretend that jobs “retained” equal jobs “gained” during their tenure; or when they pretend that jobs pilfered from neighboring states through bribery using tax money equal net job gains for the people of the United States of America. Not so. These are net JOB LOSSES through a more inequitable and corrupt system…

Posted by matthewslyman | Report as abusive

Does the Tea Party know about this?

Posted by borwitt | Report as abusive

Suppose an employee takes enough W-4 allowances they offset state taxes completely, choosing to get a fatter paycheck and send a check to the state when they file in April of the following year? Does the state forward their tax balance due for that tax year to their company in this instance, or does the company loose the money? If the latter occurs, will the company harass that employee for denying them of their blood money?

Posted by metadata | Report as abusive

I look at the list of corporations on the graph and I can name just about everything they produce. The people who are complaining about “corporate welfare,” as best I can tell, produce nothing.

When you get money from the government and produce something, that’s a “subsidy.” “Welfare” is when you get money from the government and produce NOTHING.

Posted by Geodude001 | Report as abusive

Shocked, I’m just shocked.

If you are going to have politicians, you are going to have corruption. And if you see Goldman Sachs on the list, you know you have your full answer right there.

The program makes sense, from a macro-economics standpoint; the private sector companies are much more effective spenders than the government. Problem is who’s on the list. If the program were honest we’d see something about the compensating benefits gained by the states in jobs, infrastructure or something. But we don’t, do we. I wonder what infrastructural improvements GS has made in Utah?

Posted by jwt | Report as abusive

Thbis is clearly taxation without representaion and thus Un-Constitutional.

Posted by SGTTed | Report as abusive

The Tea Party is actually making a difference, replacing tax and spend Republicans in 2010 and will do so in 2012. Obamacrats have yet to come to terms with the Democrats and their crony socialist Corporate friends stealing tax money with the approval of State Governments.

Posted by SGTTed | Report as abusive

My state, Ohio has bad govt, taxes, and weather so they bend over backwards to entice companies to stay or move in state. In many cases this includes breaks on property tax, corporate tax etc. If they’re letting them kepp income taxes, isn’t this just a more efficient method of subsidy? Either way the money is going to leave my pocket. Whether it goes to the govt first or the company, as long as it keeps my job here I for one am okay with it.

Posted by whelk | Report as abusive

Seems to me the solution is –

* Does your firm participate in this arrangement?
* If it does adjust your state income tax withholding to $0.
* File in your own behalf, quarterly, what your employer would have withheld.

Posted by 2227inna | Report as abusive

So let me get this straight. A employee works and has state level income taxes deducted from their paycheck. As far as the state is concerned, this tax has been paid. The employee is no longer on the hook for this tax.

Rather than go into the state’s coffers to be wasted by corrupt politicians, it goes to the company that person works for, to be wasted by corrupt crony capitalists.

Six of one, half a dozen of the other.

Posted by LeeReynolds | Report as abusive

Nothing will change, it will get worse, you all will post your gripe here and go about your lives the same as before.

Posted by MittRomney | Report as abusive

I sure would like to see the politicians and business owners get life in solitary sentences for this sort of dishonesty. Maybe once a few of them disappear into an 8x8x8 steel cell, welded shut, the rest will think twice about this crap.

Posted by seebert422012 | Report as abusive

Looks like a program to encourage businesses to come to these states. Go ahead, squeeze them for the taxes. We’ll take those businesses here where there is NO state income tax.. We need the jobs.

Posted by LadybugsTX | Report as abusive

From an accounting point of view it is not clear if the total tax liability or the total withholding is the amount that is being credited to the company. If the latter then the employees should stop withholding and make quarterly estimated tax payments. If the former, then the companies could be getting credit for taxes owed on income from a second job or from investments (well OK not of that lately!), which is hardly right. If the liability is prorated among the income sources then the accountants have way too much time on their hands.

No matter how it is done it is clearly an anti-competitive, industrial policy that once again attempts to pick or create winners from whiners.

Posted by CeterisParibus | Report as abusive

@matthewslyman, I’m not quite sure I get your EU comparison. But I can tell you that in the EU, subsidies to business are much more transparent than in the U.S. due to EU rules. Moreover, only poorer regions of the EU are allowed to give investment subsidies at all; richer regions are excluded from the bidding wars. The top subsidy for large firms is only 50% of the investment (compared to 99% for the Electrolux example mentioned in the article), and that maximum gets cut if the investment exceeds 50 million euros. All this adds up to EU Member States spending a lot less than U.S. state and local governments do.

Posted by kenneththomas | Report as abusive

This is just one of the incentives that states resort to in order to get a company into that state, or keep companies in their state; that’s why they call it tax incentives and this is one way of accomplishing it. And BTW, Mr Press (consultant referred to in article), competition between states is a good thing; that’s how best practices are discovered.

But, isn’t it also interesting that nearly all the states giving these incentives were forced unionism states, or the incentive was given in a year before the particular state became a right-to-work state.

Listen! I think I just heard someones point backfire.

Posted by sherlockohms | Report as abusive

If “such deals… are an inevitable result of the U.S. Constitution setting up competition between the states,” then any remedy would require constitutional amendments or a complete rewrite of the constitution. Attempting such a remedy would aggravate the divisions (often manifested as differences of constitutional interpretation) that led to the Civil War, which claimed the lives of roughly 3% of the US population. So, is the devil we know worse than the devil of opening up the constitution to major revision? (No good answer expected on my part.)

Posted by TobyONottoby | Report as abusive

We have to strike at the “roots” first, before we get to all the “secondary” problems. The root problem is the influence of “money” on Congress.

Perhaps by “public financing” or Larry Lessig thinks we need a Constitutional Convention, but it may be as simple as amending the 14th Amendment to define person as “naturally born” (of a human mother).

Please strike at the roots of the problem and Occupy the Ballot Box!

Posted by bsananda | Report as abusive

@ matthewslyman & TobyONotoby, “If “such deals… are an inevitable result of the U.S. Constitution setting up competition between the states”

Congress constitutionally assigned duty is to make the trade between the states fair and equal. This is another assigned duty that congress has forsworn and is not doing (Federal Reserve being the best known of those congress isn’y doing to the detriment of the USA.)
Corporate welfare at state or federal level is NOT any of the duties assigned to any of the three branches since it creates an unequal base with favoritism by the government at all levels to only certain companies.

So we do not need amendments, nor do we need a rewrite, etc of the US Constitution. What is needed is for the three branches to do the duties assigned to them in the way the Constitution tells them to perform them. Not to take more power for themselves – which is also illegal and “void” (as the framers put it). They just need to do the jobs we voted them in for as the blueprint for our government describes their duties to be, no more, no less.

Posted by Knine | Report as abusive

An Alternative to Capitalism (if the people knew about it, they would demand it)

Several decades ago, Margaret Thatcher claimed: “There is no alternative”.
She was referring to capitalism. Today, this negative attitude still persists.

I would like to offer an alternative to capitalism for the American people to consider.
Please click on the following link. It will take you to an essay titled: “Home of the Brave?”
which was published by the Athenaeum Library of Philosophy:

http://evans-experientialism.freewebspac e.com/steinsvold.htm

John Steinsvold

“Insanity is doing the same thing over and over and expecting a different result.”
~ Albert Einstein

Posted by John_Steinsvold | Report as abusive

It would seem that employees whose state taxes were withheld and not retained by the state that they might have a case to claim those funds.

Posted by Cvmace | Report as abusive

This is theft, pure and simple. It is also theft by deception.

The reason it happens is that we do not have free and fair elections with proportional representation. Thus our system is gamed so that there never is a genuine set of choices presented on a ballot and that maintains the same coalition of the powerful in control. Allowing monopolies, especially in the media and communications areas, makes these manipulations possible.

The entire system has become incredibly corrupt, meaning people benefit through surreptitious means while maintaining an exterior show of honesty, to the extent possible. Nothing is as it seems. Those states are short money because they give it away to the powerful while claiming to serve their ordinary citizens. Then the powerful kick back a percentage of the take in “campaign contributions”. Say, are drug kingpins powerful? Corrupt.

Posted by txgadfly | Report as abusive

Interesting that the study was partially funded by the Ford foundation and Ford Motors is #3 on the list of companies receiving the most benefits. This seems like a Auto Industry perk and a tool NJ uses to lure (bribe ?) new business.

This does not seem right and thanks for exposing it David. I hope it reminds some wealthy donors to not leave $$$ to your foundations. By the time the 3rd generation of layabouts take over, they have turned on your original goal and push the social justice agenda. Probably because they think everyone could be rich without earning it, like themselves.

Posted by curleybrothers | Report as abusive