How corporate socialism destroys

By David Cay Johnston
June 1, 2012

IRONDEQUOIT, N.Y. — A proposal to spend $250 million of taxpayer money on a retail project here illustrates the damage state and local subsidies do by taking from the many to benefit the already rich few.

Nationwide state and local subsidies for corporations totaled more than $70 billion in 2010, as calculated by Professor Kenneth Thomasof the University of Missouri-St. Louis

In a country of 311 million, that’s $900 taken on average from each family of four in 2010. There are no official figures, but this one is likely conservative because — as documented by Thomas, this column and Good Jobs First, a nonprofit taxpayer watchdog organization funded by Ford, Surdna and other major foundations — these upward redistributions of wealth keep increasing.

In Irondequoit, just outside Rochester, N.Y., and a few miles from where I live, developer Scott Congel wants $250 million in sales taxes to finance rebuilding the Medley Centre mall while adding condominiums and a hotel. Typically local governments issue bonds, which are paid off using sales tax receipts that are diverted from public purposes to the developer’s benefit.

Subsidies for retail businesses are the worst kind of corporate welfare because, as the end of the economic chain, retailing grows only when population and incomes increase. If population or income falls, then subsidies for new projects like Congel’s damage existing businesses, where people would otherwise be spending their money.

The mall, which struggled from the start, was built in 1990 for $140 million in today’s dollars. A Congel associate, Adam Bersin, bought it in 2005 for less than $6 million in today’s dollars. He then persuaded the Monroe County industrial development agency to issue $5.4 million in bonds and then flipped the real estate to Congel in 2007.

Today the mall is empty, its doors sealed, except for a Sears at one end and a Macy’s at the other, each with a handful of customers during my visits.

Congel promised a $260 million project, but five years on nothing is built and Congel is seeking delays in fulfilling promises for which the mall was granted property tax breaks.

That’s how corporate socialism works – taxpayers contribute when the market rejects.

TAXPAYERS’ EXPENSE

Congel has never spoken publicly about his plans for the mall and neither Congel nor any of his representatives, including a lawyer, returned my calls. But la st month hi s office gave a local TV station a statement promising to invest not $260 million but $750 million

My review of construction costs for hotels and condominiums suggests the $750 million figure is wildly inflated, but it may make the subsidies more politically palatable.

If the larger figure is real, and taxpayers put up $250 million, they would pay for a third of the project, while for a $260 million project the taxpayer share would be 96 percent.

Having taxpayers pay nearly all of a new investment is becoming common. General Electric, for example, is getting Ohio taxpayers to cover 92 percent of a $126 million project

That’s how corporate socialism works — taxpayers donate capital, while the owners keep the profits.

Congel, along with GE and others, should rely on the market to finance projects. If a project is sound, the market will finance it and, if not, why should taxpayers donate?

When the Monroe County industrial development agency gave Congel’s plan initial approval I asked for its due diligence. The county provided a thin report stating that if taxpayers finance the restoration Medley Centre’s sales would grow from $30 million annually to $420 million.

The report cover states that Congel commissioned it. Judy Seil, director of the agency which gives money to companies, confirmed that Congel paid for the report. Still, she insisted, the report is the county’s due diligence.

That’s how corporate socialism works. The poor may have to pass a drug test to get benefits but rich applicants write their own ticket.

My due diligence shows that total inflation-adjusted income in Monroe County fell by $2.5 billion, or 13 percent, from 2000 to 2008, the latest data. With such a steep drop in incomes it seems unlikely that Medley Centre sales could grow 14-fold.

That’s how corporate socialism works — ignore inconvenient facts.

WINNERS AND LOSERS

As for that proposed hotel, my analysis of county hotel tax data shows demand for lodging unchanged for two decades. If taxpayers finance Congel’s hotel it would either fail or almost certainly force an existing hotel or two out of business.

That’s how corporate socialism works — government, not the market, picks winners and losers.

Last November I warnedthat New York State taxpayers would have their pockets picked ever more thoroughly because of a decision by the state’s highest court

The majority acknowledged that the New York State constitution bans gifts to corporations. To get around this, the court ruled, tax dollars can be funneled through a government economic development agency like the one Seil runs.

That’s how corporate socialism works — ignore inconvenient laws.

Because New York had one of the strongest prohibitions among the 50 state constitutions, this ruling shows how easily corporations can plunder state treasuries.

New taxes to pay for stadiums for team owners, billion-dollar-plus gifts for building factories and the pocketing by 2,700 companies of state income taxes paid by their workers have become common

That’s how corporate socialism works — divert money from schools and other public services to company coffers.

The 50 New Yorkers from libertarians to liberal Democrats who brought the case asked for a rehearing, citing serious factual errors in the high court’s decision

The court not only denied the request, it also imposed $100 for court costs. Attorney James Ostrowski of Buffalo, who represented the plaintiffs, called that a gratuitous “slap in the face of people who litigated a matter of vital public interest on a shoestring budget.”

That’s how corporate socialism works — penalize anyone with the temerity to fight being taxed to give to the already rich.

Congel may never get $250 million of taxes, but if he does it will cost taxpayers whether they visit his mall or not, while weakening or destroying existing local businesses.

That’s how corporate socialism works — privatize gains, socialize losses and destroy competitors who do not get subsidies.

30 comments

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Class warfare has been waged by conservatives and neo-lilberals for decades now. The public the world over is paying the price.

The system has failed.

“That’s how corporate socialism works — privatize gains, socialize losses and destroy competitors who do not get subsidies.”

Not only corporate socialism, this is how capitalism has been working. Privatize the gains and socialize the losses. Then the privateers have the nerve to throw around the word socialist or socialism when it suits them.

Posted by TheUSofA | Report as abusive

I live 100 miles from Rochester, outside of Syracuse. The Congel family has an on-going plunder of the federal, state, county and city treasuries for the past 22 years in the form of a shopping mall.

It is now called “DestiNY, USA” and has been expanded. The Congels claim it will draw more visitors than Disneyworld or Las Vegas — seriously!

Starting in about 1990, Congels built a large mall on a brownfield site in the city and received something like 30 or 40 years of no property taxes and got county industrial development bonds to help build the place. The state of NY provided $50 million in “incentives” for building on the brownfield (they simply covered up a former dump with asphalt and made it a parking lot). Chuckie Shumer facilitated issuance of $228 million in tax-free “green bonds” for a mall expansion (they have a few solar panels on the roof). The city and county pay for all sorts of infrastructure improvements around the mall, taxing homeowners to fund them.

We have also been promised a hotel — 700 rooms, I think it was. Next to the county sewage plant, overlooking Onondaga Lake, one of the most polluted lakes in the US. As you know, Syracuse is a Destiny-ation for tourism. We are still waiting for the hotel…

Meanwhile, the empty hulks of other malls dot the landscape.

I think all this is supposed to provide “jobs” for the region — Syracuse has a poverty rate of 35% and the majority of students do not graduate from city schools.

The root of the problem of corporate socialism is the rancid two-party system of demopublicans and republicrats. Robama and Obomney epitomize them — there ain’t a dime’s bit of difference between them. When the billionaires come asking for favors they respond with equal vigor and enthusiasm and hit their knees.

Corporate socialism won’t stop until the two party system is dumped in the rubbish heap.

Posted by upstater | Report as abusive

That empty mall, pictured above, with stores converted, would make for a lovely public housing community . . .

Posted by SeekListenLove | Report as abusive

… might even be room enough for a local community school, with the resources to graduate and contribute the undeveloped, untapped brainpower of that 35%.

Posted by SeekListenLove | Report as abusive

If politically connected folks extorting money is a new concept, you need to get out more. All the Southern states flung massive giveaways at third world car makers to induce them to build in their state for the jobs. Sports teams extort public funding with threats to move the franchise somewhere willing to build a new facility. Every city, county and state offers abatements of property and sales taxes at a minimum. It would be cheaper if governments simply gave the incentives directly to unemployed folks to pick up trash along the highways plus it would look better too!

Posted by Robocop5626 | Report as abusive

Subsidy not to the people but for corporation, that is what Romney stand for. It seems half of American swallow his dumb mantra. The Tea party
Somehow if we cut corp tax then companies will start investing and create more jobs. Corporations are the crooks, they only care about profit, NOT people’s welfare or benefit
Look at the gridlocked congress, we can see the mess and pig headed Tea party

Posted by cutegringo | Report as abusive

Great article, David Cay Johnston.

And many thanks to Reuters for allowing it to be said.

And the comment posts enhance it still more.

Posted by AdamSmith | Report as abusive

They only remove the government teat from their mouths long enough to gurgle out the words “free market” before they go back to sucking our country dry.

Posted by josefski | Report as abusive

@ SeekListenLove

Clever idea. Maybe a dance club/bar/hotel?

Posted by eddiefresh | Report as abusive

I agree.

“Corporate Socialism” is an oxymoron.

Posted by PseudoTurtle | Report as abusive

Insightful article – Thanks for your effort.

Posted by CanyonLiveOak | Report as abusive

Lets end socialism of all kinds in this country. It is all bad, not just the corporate version. Shrink the size of the government, let capitalism lead the way with appropriate safeguards, and move on. There is way too much government interference currently, and if you really evaluate the skills of the typical politician, you wouldn’t trust them to do anything with your money, your health, or anything else of importance to you (assuming you are the type of adult who feels they can make decisions for themselves- if you aren’t- you really shouldn’t be voting).

Posted by USA4 | Report as abusive

This isn’t Socialism. Socialism implies a public stake in the business, and all the public gets out of these deals is the bag.
Worse, as Mr. Johnson points out, the public ends up subsidizing businesses that take money out of their community, leaving it poorer. See:

http://anamecon.blogspot.com/2012/05/sou nd-you-dont-hear-is-sound-of-money.html

It’s pure exploitation. No respect for the people or their community at all.

Posted by gregstp | Report as abusive

We take for granted that the money spent by corporations on building their own infrastructure is their own. Far from it. Hardly anybody pays any attention to the source of capital. Initially the promoter invests a few percent. Then he sells the project to investment managers and other big investors and allots them promoter’s shares at throw away price. Yes, throw away price. Often it is a few cents per share. Once the project is at construction stage, big banks come in and lend capital. Once the project is completed and is on the run, then a public issue of a fraction of total capital takes place, where the original promoters make a killing by selling shares allotted at a couple of cents for several dollars. Remember the recent Facebook IPO? At that stage almost all the money invested is taken back by promoters and initial investors with enormous profit, but still they hold on to a good majority of shares in their own hands. Who are the IPO investors? Mostly small investors and / or investment companies, mutual funds, etc. which are in turn owned by public share holders. But the management behaves as though the whole capital belongs to them and public has no place in it. If the corporations are taxed, it is not their investment which is affected. It is the money belonging to shareholders aka general public. The CEO or Board of Directors do not own the corporations, though mostly they are referred to as owners and their wealth is calculated on the basis of their shareholdings. Don’t be misled by the argument that after all they risk their own original investment in case the company does not take off. At that stage when it is found that there is no future for the company, they would have already recovered the capital invested or taken a 100% deduction towards the loss in their tax returns, which is again a subsidy from government, i.e. you and me. After all this swindling, we are told that subsidies are not good for ordinary folks and they should try to stand on their own legs.

Posted by nirmasuma | Report as abusive

This isn’t Socialism. Socialism implies a public stake in the business, and all the public gets out of these deals is the bag.
Worse, as Mr. Johnson points out, the public ends up subsidizing businesses that take money out of their community, leaving it poorer. See:

http://anamecon.blogspot.com/2012/05/sou nd-you-dont-hear-is-sound-of-money.html

It’s pure exploitation. No respect for the people or their community at all.

Posted by gregstp | Report as abusive

“taxpayers donate capital, while owners keep the profits . . . ” Geez, sounds familiar. Public or private, the money pit has turned into an abyss. We can’t print enough cash to fill it although we try mightily. Well, at least we’ve got FB equity to fall back on.

Posted by JAMBROSI | Report as abusive

All of this “corporate socialism” is just kick backs to the people who bankroll “business friendly” candidates. I believe candidates should be randomly selected, as they are for jury duty, given a chance to express their views, then we vote on the people selected. Removing the money going to the candidates is the only way to stop the hemorrage of public money.

Posted by smanchwhich | Report as abusive

Term caps and stricter funding rules would stop this corruption

Posted by GA_Chris | Report as abusive

This is an exact description of the “Town Center Mall” here in Santa Maria, CA. The entire downtown was completely torn down and two giant malls were planned. The first was built, but when it proved to be a disaster, a strip mall and a (now empty) big box was built on the other side. The entire heart of our town is gone and now we now have mostly empty large structures. Corporate socialism has turned this city into a heartless, characterless and featureless collection of strip malls and big boxes and there is nothing left of our town to inspire pride or a sense of community.

Corporate socialism implies the power of Big Money to coerce and control unsophisticated, stupid, petty and corrupt local governments who, when dealing with these people are far, far out of their league. What is really needed (IMHO) is a National network of legally sophisticated activists who have the tools and the will to fight these people — something like the ACLU, but who’s purpose is to fight these people and beat them at their own game. All the blathering about “changing the rules” and “kicking the bums out” and all that other stupid right-wing talk is just playing into the hands of the corporations. We need a legal foundation and I would be willing to donate to such an organization.

Posted by geojohn | Report as abusive

Congress could tax it, levying an excise tax on recipients of state/local govt gifts to business entities. Set the rate at 75%, say, or 90% and use the revenue to cut other federal tax rates (thus making it Grover Norquist-compliant for Republicans who’ve signed the no new taxes pledge).

Like any other Pigouvian tax, simply by discouraging harmful activity, the public wins regardless of how much revenue it generates. The law could be written broadly enough to also capture the value of federal gifts to corporations– royalty-free radio spectrum and mining rights, to name two– but let’s not crazy. :o)

Posted by beowu1f | Report as abusive

Hah! Well said, @beowu1f!

Posted by LEEDAP | Report as abusive

@USA4 Sir/Mame, there is NOTHING more unAmerican than adivising other Americans they should not vote. Why don;t you mind your own business?

@upstater That was a powerful and sad post. I thank you. The graduation rate you mention is alarming. Also, though I agree with your summation of the problem residing with our corrupt two-party system, I disagree things will get much better if we simply bring in more parties. If that were to actually occur, we would still see the blatant corruption. The only thing that stops corruption is sending people to long jail sentences or war. Not class war, but a real civil war between the haves and the have-nots. History is replete with these types of wars. As it ever was, as is shall ever be.

Posted by krimsonpage | Report as abusive

Thank you David Cay Johnston and Kenneth Thomas of the University of Missouri-St. Louis!

America’s Neo-Conservative movement loses steam after suffering declining US GDP growth since 1981. MBA growth since Gordon Gecko appears to relate to ever lowering GDP growth.

Our assumptions about management and performance have been missing the mark for thirty years. http://goo.gl/ZrFOT

Posted by economicgps | Report as abusive

Old word of subsidies to the rich that do not help the greatest number is GRAFT.

There are subsidies to firms that help the many such as export subsidies to firms with strong products that can produced here. There research subsidies either for drugs or guns etc.

But graft is just graft.

Posted by SamuelReich | Report as abusive

The author is “scared” to use the phrase “crony capitalism”, lest it makes capitalism look bad.

Regarding gov/federal intervention and entitlements that has been true for US since the last 100+ years. The entire hitech industry is a beneficiary of federal entitlements. Anybody remembers DARPA and Military Industrial Complex ? Thats the wrapper around federal entitlements.

Posted by capitalP | Report as abusive

Progressives always borrow ahead expecting population explosions in the future to pay for their excesses.Has that ever changed?

Posted by justthoughtof | Report as abusive

Nothing new here. As always, Americans shooting themselves in the foot, the world’s greatest suckers.

Posted by GMavros | Report as abusive

David: You represent a diminishing source of factual and pertinent information. Thank you for that. The things that are pulling this country’s economic structure apart have reached a fever pitch and it’s making my head spin.

The problem is, nothing is being done about it, nothing is improving. Our government has been taken over by profiteers and they’ve morphed our system into a system designed to be easily abused to create wealth for about .1% of the American people at the expense of about 99.9%.

I’m old enough to remember how well things worked back in the 60s, and I know my history well enough to know how well our system worked in the 40s and 50s (with the exception of our racist policies against African Americans.) But now we act as though that, arguably, greatest period of our history never happened. It doesn’t seem to occur to anyone to emulate what worked so well for us during that period of US history. I realize that much has changed, but there is still much that can be gleaned from that time that we could successfully employ to our advantage today.

The problem seems to be that there was too much in place, e.g., a progressive tax code, that today’s profiteers see as hampering their stockpiling of wealth, never mind that during that time all segments of the economy prospered. And that’s the problem. Not only are the people who now control this country only concerned with increasing their own wealth, but it’s now become clear that in order to do it to the extent they have become accustomed to, it has to be to the detriment of everyone else–roughly 99.9% of the US population. And yet we, 99.9% of us, still seem to be impotent toward taking any steps whatsoever to rectify the problem. And my head continues to spin.

Posted by flashrooster | Report as abusive

Sounds like the Bain model for the economy. Your workers make you money, so you…. pocket the money and fire the workers. Now there’s a sustainable approach to capitalism.

That’s like eating the packet of corn seed instead of planting corn. “What. I was hungry!”

Good times. Romney is a sell.

Posted by AlkalineState | Report as abusive

The NFL has salary caps for players and franchises. It’s time for a similar system be implemented on the country as a whole.

Posted by KyuuAL | Report as abusive