Corporate subsidies ignite a race to the bottom

by Brian Leubitz

It is not often that I read something on the FlashReport that I can agree with in the general substance. But, while the article was intended to be a slap at Jerry Brown, the Reason Foundation’s (a right-wing libertarian group) Adrian Moore, PhD, takes on corporate subsidies.

Proponents argue that while cases such as Solyndra are unfortunate, they are a necessary evil that must be tolerated since the benefits of governmental “investing” in certain technologies or industries will, in their view, someday outweigh the costs. I’d point out that the government rarely knows what is both certainly beneficial and inadequately funded by the market, but even worse is a lousy investor, giving to well connected companies, not those with the best business plan, and not caring if the investments pay off or not, only the newsbite when the check is written.

The Reason/Howard Jarvis study looks at specific corporation tax and sales and use tax credits, deductions and exemptions in order to evaluate whether they serve their purpose. The argument offered in support of such tax breaks is that they will improve the lives or livelihoods of certain classes of individuals, businesses or industries. But their costs are frequently ignored. While they may encourage business activity in a certain sector of the economy, this comes at an unseen cost, which is the business activity that would otherwise have taken place in other sectors of the economy. (FR)

These all fairly reasonable points here. Perhaps California does spend too much on corporate subsidies to lure jobs. Perhaps we should be asking ourselves whether the government should be subsidizing corporations at all.

But this should be part of a larger conversation that we should be having at every level of government. The most visible examples of these subsidies come in the context of sports, where teams are lured with free land, tax credits, and sometimes a brand new stadium with a pretty bow on top. But it isn’t just sports where we see this. In a great series in the New York Times, Louise Story investigates the troubling growth in tax subsidies that are going to specific corporations, and how an entire cottage industry has grown up to game the system. (She also gave a very interesting interview to Terry Gross on NPR’s Fresh Air.)

The fact of the matter is that yes, California does spend a fair chunk of change on corporate subsidies. The Times quotes a figure of $4.17 billion, or $112 per Californian. But if you look to the right, you’ll see that our $112 per capita pails in comparison to other states. Especially some very heavily Republican states. Alaska spends nearly a thousand dollars per person! And Rick Perry has spurred the people of Texas to spend over $750 per person. This turns out to be real money:

The math on the new deal angers former Amazon workers, especially those who are still unemployed. For Texas to give up more than $250 million in tax revenues in exchange for 2,500 jobs amounts to about $100,000 per job. Most distribution workers are paid $20,000 to $30,000 a year. The rest benefits the company’s bottom line, which generally increases executive bonuses and shareholder returns.(NYT)

This is the new math of corporate subsidies and job creation. And, unfortunately, California carries a special burden in this area. Film subsidies have been some of the hottest growth areas, garnering a full story in the Times. States and cities find it attractive to get a movie shot in their area, and so spread the cash around. Michigan, Louisiana, and pretty much every other state have tried to lure Hollywood away from, well, Hollywood. (Canada has also been aggressive in this area as well.)

The article is on FlashReport, so of course, it is rather unnecessarily partisan. It calls out Gov. Brown, and name checks Solyndra, and the film tax credit. Solyndra, of course, being the big cause celebre of conservatives for collapsing under the weight of cheap solar panels being dumped on US shores after having received federal loan guarantees. And this being California, conservatives like Dr. Moore get to blame the evil liberals in the legislature for all these ills.

But Dr. Moore is probably right that we shouldn’t be spending so heavily providing cash to corporations. He and I clearly disagree about what should come of that money, lowering the corporate tax rate would fall significantly behind investing in education and other priorities, but that’s a topic for another time. Unfortunately, we live in a competitive world, and our governments are competitive as well. In many ways, it is something of a mutual self-injury pact. Local governments compete against one another, and the individual citizen gets lost in the shuffle.

Clearly, we, as a nation, need to do a better job of monitoring this process. And we need to have a conversation about whether it is in our best interest for states and municipalities to compete in this manner. Dr. Moore (and the NYT’s Louise Story) do us a favor by raising this issue. It deserves serious consideration, perhaps with a touch less of the absurdly misplaced partisan rancor, about how we government goes about the task of “job creation.”  

SACRAMENTO, CA – Consumer Watchdog today called on state and local governments to quit spending taxpayer millions on Scott toilet paper, Kleenex tissues and other products from Kimberly-Clark Corporation. The global company is part of a corporate coalition battling to keep a tax loophole that benefits only out-of-state corporations—to the detriment of California schools, local governments and state services.

In letters to Gov. Jerry Brown and the mayors and executives of 21 cities and some large counties, Consumer Watchdog also urged governments to avoid Chrysler and GM auto and truck purchases. The automakers are also in the coalition of out-of-state corporations eager to evade corporate taxes in California.

The letter to Gov. Brown said in part:

“Every dollar of taxes evaded by large corporations is another dollar taken from our schools, fire and police protection and support for the impoverished and disabled.  We ask you to set an example by avoiding taxpayer-funded purchases from out-of-state companies lobbying to protect a state loophole that lets them pay less than in-state companies.

“A ripe target is toilet paper and other janitorial products made by Kimberly-Clark, whose brands include Scott paper products and Kleenex. The global company is part of a corporate coalition battling against efforts to use the same corporate tax formula for all companies that sell products in California, as almost all other major states do. California’s “take-your-pick” loophole costs the state up to billions of dollars a year. Constituents would both smile and applaud your vow to “Flush Tax-Evader Toilet Paper.”

“We also ask you to avoid taxpayer purchases of Chrysler and GM autos and trucks for public safety and other state uses, as well as cardboard products from International Paper Co. They are in the coalition with Kimberly-Clark formed specifically to lobby against a legislative proposal and likely ballot initiative that would close the tax loophole.

(Click here to see the letter to Gov. Brown. The letters to localities are similarly phrased.)

A Consumer Watchdog analysis of California purchases through a state purchasing coalition in the current fiscal year shows that Kimberly-Clark products account for 20% to 25% of total “janitorial supply” orders, and over $1.6 million of taxpayer spending in a year. Only some counties, cities and state agencies use the purchasing contract, so the statewide total would be several times larger than  $1.6 million. However, the proportion of purchases is likely to be similar statewide, said Consumer Watchdog.

“We want local and state government to flush tax-evader toilet paper,” said Judy Dugan, research director for Consumer Watchdog. “State universities, local police departments and other agencies that buy Kimberly-Clark products are also buying themselves deeper cuts in essential services. There are plenty of better choices on the market.”

The Consumer Watchdog analysis looked at Department of General Services order lists for janitorial supplies during two quarters of 2011. On an annual basis, orders for Kimberly-Clark products would total more than $1.6 million. (see Excel charts for Q1 and Q3 of the 2011-12 fiscal year linked below.) Independent purchases by many cities and counties would likely at least triple the amount. For instance, Los Angeles, San Diego, San Francisco and Sacramento do not list any purchases through the state contract.

Kimberly-Clark sells 122 products to state and local governments through the janitorial supply company Waxie, which has a multi-state contract for cleaning and janitorial supplies under the Western States Contracting Alliance. Purchases included several counties, small cities, state universities, transit and police agencies.

Kimberly-Clark is one of four global corporations in the deceptively named “California Employers Against Higher Taxes” coalition. The group was formed to fight elimination of an “alternative” corporate tax calculation that benefits out-of-state companies. The loophole costs California up to billions of dollars a year at a time when schools, protective services and aid to the disabled are being slashed.

Two other members of the pro-loophole group, Chrysler and General Motors, recently lost out on a large state contract for nearly 2,000 police cruisers and utility vehicles, for the California Highway Patrol and other agencies. The contract, worth close to $50 million over two years, went to Ford, which is not part of the pro-loophole coalition.

Click here to see Consumer Watchdog’s news release on the police cruiser contract.

“The state’s large contract for Ford vehicles sets a good precedent for putting taxpayer money in the right hands-a major automaker willing to pay its fair share of California taxes,” said Dugan.

The fourth member of the coalition is International Paper, which makes cardboard products including the boxes in which California produce is shipped. Its products, usually unbranded and sold through middlemen, are hard to track. A fifth member, Proctor and Gamble, dropped out of the coalition following public protests against its products.

Click here to see Consumer Watchdog’s analysis of federal tax evasion by members of the  pro-loophole coalition.

The two efforts to close the loophole are legislation by Assembly leader John Perez (AB1500) and a ballot initiative sponsored by tech multimillionaire Thomas Steyer, who fought successfully in 2010 against Proposition 23, which would have benefited oil companies. The proposals would shift California to the corporate tax system used in other major states–a single tax calculation that is primarily dependent on the amount of sales a company made in California.

Consumer Watchdog, a nonprofit, nonpartisan consumer advocacy group, does not support any particular proposal to fix the loophole as long as it stops the gaming of the state tax code.

Here are links to quarterly lists in xlsx format of janitorial purchases through state purchasing contracts.

Q1, 2011-2012

Q3

Cities and counties to which letters are being faxed include: Los Angeles, Long Beach, Los Angeles County, San Diego, San Diego County, San Francisco, San Jose, Irvine, Santa Ana, Anaheim, Orange County, Sacramento, Riverside, Fresno, Oakland, Bakersfield, Stockton, Fremont, San Bernardino, Modesto, Oxnard, Fontana, Chula Vista and Santa Monica.

State, Cities Urged to Bar All Taxpayer Purchases From Chrysler, GM, Other Tax Dodgers While They Refuse to Pay Fair Share

The state’s award of a contract for up to 1,900 Ford vehicles for the California Highway Patrol and other state agencies is a snub to GM and Chrysler, which eagerly sought the prestigious contract.

Consumer Watchdog applauded the tentative award, noting that of the Big 3 U.S. automakers, only Ford is not in a coalition battling to keep a California tax loophole that benefits large out-of-state corporations to the tune of at least $1 billion a year.

The nonprofit, nonpartisan Consumer Watchdog calls on the state and major cities, which it will be contacting, to bar all non-safety-related purchases of Chrysler and GM products until they cease their campaign and pledge willingness to pay the same tax rate that in-state corporations pay.

“Taxpayers shouldn’t be paying millions to automakers that are happy to starve California schools, police departments and disabled people of funding,” said Judy Dugan, research director for Consumer Watchdog. “What’s good for the CHP should be fine for other police departments and government agencies.”

Even with substantial state discounts, the contract for up to 1,800 Taurus-based police patrol cars and 100 Explorer-based police utility vehicles would likely be worth more than $50 million over time. Dealer prices listed online for the civilian models of the patrol car range from about $30,000 to $32,500, without costly additions like bulletproof doors.

The state is sharply cutting back its civilian auto fleet and the CHP has scaled back as well, but wear and tear force the CHP and other public safety agencies to replace vehicles at about 100,000 miles.

The state’s current tax loophole allows many out-of state companies with major sales in California to pay a lower tax rate than in-state companies, depriving the state of $1 billion or more a year, according to the state legislative analyst. Closing the loophole would help restore essential services axed in the current budget crisis, said Consumer Watchdog.

Two other major corporations, Kimberly-Clark (Scott, Kleenex, Huggies products) and International Paper have joined GM and Chrysler in the deceptively titled “California Employers Against Higher Taxes.”

Chrysler more than doubled its state lobbying expenses in the first quarter of this year, to $32,500, as it added two corporate tax reform bills, AB1500 and AB1501, to its lobbying list reported to the Secretary of State.  The larger General Motors spent more than $86,000 on state lobbying in the first quarter, and added the same legislation to its lobbying list. If a separately proposed ballot initiative to close the tax loophole qualifies for the ballot, the four companies are expected to up the ante on spending.

“The state and cities of California owe taxpayers the respect of shunning companies that are driving the state further into a hole of debt,” said Dugan. “The CHP contract is a great start. Other agencies should quickly and publicly pledge to stay away from the tax dodgers at Chrysler and GM.”

Resources:

State announcement of tentative award (no other bidders protested the award during the protest period)

Bid pricing list from the state’s request for proposals

Consumer Watchdog’s previous press release on the tax evasion history of the corporate coalition (from which founding member Proctor and Gamble has since departed)

Out of State Corporations Fighting to Keep Tax Loophole Are Top U.S. Tax Dodgers, Says Consumer Watchdog

Companies With Major Sales in California Can Game Current System to Pay Lower Taxes Than Many In-State Businesses

Three of the five global corporations behind a coalition aimed at protecting $1 billion a year in California tax loopholes are among the nation’s top tax evaders, said Consumer Watchdog. They are:



• International Paper Co., whose outlandish deductions and credits gained through Congressional earmarks left it with less-than-zero federal taxes on $198 million dollars in 2010 profit. The company’s refund of $249 million exceeded its profits.
• Procter and Gamble, described by Fortune Magazine as in a class with GE when it comes to tax manipulation. It structured more than $6 billion in sell-offs since 2002 to avoid billions in federal tax and hundreds of millions in state taxes.
• GM, which is still partly owned by taxpayers and paid only $570 million in federal taxes on a net profit of $9 billion-a 6% corporate tax rate. That made it one of the lowest-taxed among high-profit corporations, according to Forbes Magazine.

The other two members of the deceptively named “California Employers Against Higher Taxes” are bailout recipient Chrysler and Kimberly Clark, which Wisconsin researchers found was evading state taxes. (See details on all members below)

“The real business of this coalition is to protect global corporations’ unfair and lucrative tax loopholes that deprive Californians of good schools and services,” said Judy Dugan, research director of Consumer Watchdog. “It’s especially galling coming from tax evaders or automakers that abandoned their plants and employees in California, took billions in taxpayer bailout money and in Chrysler’s case, kept $4 billion of it as a gift.”

The out-of-state coalition was recently organized to fight proposed legislation that would eliminate a two-tiered system in California, passed in 2009 over consumer objections, that allows national corporations to pick which California tax calculation they use. By picking one or the other based on how much profit they made in California, companies can evade millions of dollars in state corporate taxes. A 2009 study by the state legislative analysts’ office found the system unfair to many in-state companies, confusing and subject to corporate gaming.

LAO report

“It’s like letting children pick which parent they’ll obey, or companies to pick which regulator will oversee them,” said Dugan. “Obviously they’ll go for the most lenient.”

The current legislative plan (Perez, AB1500) would shift California to the system used in all major states–a single tax calculation that is primarily dependent on the amount of sales a company made in California. Consumer Watchdog said it does not support any particular proposal to fix the loophole, as long as it stops the gaming of the state tax code.

The aim of the “California Employers” is obvious in their corporate histories:

International Paper: A study by the Institute for Policy Studies found that in 2010 the company paid zero taxes on $198 million in profits, and in fact ended up with a $249 million credit. At the same time, CEO John Faraci got a 75% pay hike to $12.3 million. The company’s tax deductions came from two subsidiaries in tax havens and from large deductions and credits for its longtime use of a waste byproduct at paper mills, known as “black liquor,” for fuel. The company lobbied heavily for this boondoggle, even though it did not reduce International Paper’s use of fossil fuels. Conservationist and environmental groups cried foul, but the company prevailed. While the company has several locations in California, they are mostly low-paid box-making facilities and warehouses. It is trying to sell but could also close a pulp plant with higher-paying industrial jobs in Port Hueneme.

Bloomberg on “black liquor” earmark

IPS study

Chrysler: The automaker took $13 billion in federal taxpayer bailout money in 2009. It kept $4 billion as a gift in its Chapter 11 bankruptcy proceedings. Another $3.5 billion that was counted as Chrysler payback was actually a loan to the Italian company Fiat in a complicated deal. Most galling, Chrysler’s bankruptcy deal gave it a free pass on liability for defects in pre-2009 vehicles. For instance, a California family badly injured in fire that destroyed their Jeep vehicle was banned from seeking any accountability for or damages from Chrysler. Chrysler’s only significant presence in California is its franchise auto dealers, many of which were shut down by the company in its bankruptcy. Chrysler’s auto assembly plant in Los Angeles, which once made 40,000 vehicles a year, closed in 1971.

Liability cancellation

Fiat loan

Procter and Gamble: The global corporation is also a giant in tax avoidance. It evaded $2 billion in U.S. federal taxes and hundreds of millions in state taxes since 2002 through complex manipulation of its more than $6 billion in sell-offs of brands. The buyers also evaded taxes at least temporarily and perhaps permanently. Procter and Gamble has subsidiaries and some plants in California, but its U.S. jobs are concentrated near its Ohio corporate headquarters.

Tax evasion:

GM: Taxpayers shoveled nearly $60 billion into bailing out General Motors, and are still on the hook for up to $27 million, depending on the future price of GM stock. And in 2011, GM paid only $570 million in federal taxes on a net profit of $9 billion-a 6% corporate tax rate. Taxpayers also still own at least a quarter of the company, which puts its opposition to fair taxation in California in a darker light. As for being a “California Employer,” GM exited its last auto plant in the state, a joint venture with Toyota in Fremont, in 2009.

Kimberly Clark: State researchers in Wisconsin found that Dallas-based Kimberly Clark paid Wisconsin state taxes in only three of the 10 years from 2000 through 2009, despite a large corporate presence in the state. At the same time, its CEO pay soared 339%, from $2.6 million to $12.4 million. The current tax system makes it easier for the Kleenex giant to do the same in California.

Wisconsin

Dave Johnson, Speak Out California.

So they reached a budget deal.  The gap was closed entirely with cuts to essential service, schools, health care, etc.  Democrats had to cave out of fear that elderly people literally would not have oxygen tanks.

And to add insult to injury, instead of paying for the oil they take from the state the oil companies receive waivers to allow them to drill offshore!  In the last deficit-fix deal big corporations got a huge tax cut and now oil companies get more of our oil for free.  And we will suffer more pollution of our coasts.  (It’s pretty clear from deals like these who is in control of the Republican caucus.  The citizens get services taken away, the big corporations get perks that increase the deficits.)

This is a Republican budget deal, entirely on their terms.  Make them own it.

Here is how you make them own it: Make them vote for it.

Before any Democrat votes for this deal, every single Republican has to vote yes.  When the voting start, just sit there.  Wait.  And then when the Republicans have all voted, ONLY THEN should Democrats start voting, but not before. 

If we are going to have to live with a budget forced on us by Republicans and oil companies, then the Republicans have to show up and vote for it.

Click through to Speak Out California.

Dave Johnson, Speak Out California.

Marketing works.  But we already knew that.  Big business has been marketing the idea that corporations making decisions for us is better than having government run by the people.  And a lot of people have bought into that idea.

But is it really better to be government by corporations?  In February I wrote,

After decades of anti-government speeches claiming that government holds back business, government takes money out of the economy and government is less efficient than corporations, people came to believe that, as Ronald Reagan famously said, “Government is the problem, not the solution.”  This led to deregulation and budget cutbacks in all areas including education and infrastructure. 

If you think about it, government really is what We, the People want it to be.  In a democracy we jointly make decisions about the best way to manage our affairs.  So saying that corporations do things better is really an anti-democracy message.  What they are saying is that organizations run by a few wealthy elites telling everyone else what to do, with the benefits of everyone’s work mostly going to those few at the top, is a better way to manage society than to have everyone making the decisions and sharing in the results.

Just for fun, here is the video from that post again:

Here is more proof that marketing works:  A recent Gallup Poll of public trust of government vs corporations found that the public still would rather be governed by big corporations than by themselves.

Gallup’s recent update of its long-standing trend question on whether big  business, big labor, or big government will be the biggest threat to the country in the future finds Americans still viewing big government as the most serious threat. However, compared to Gallup’s last pre-financial-crisis measurement in December 2006, more now see big business and fewer see big government as the greater threat.

Gallup’s results, graphically:

Marketing works.  Especially when it is repeated over and over for decades, unopposed.  This blog reaches a moderate audience, but the message that government by the people is a good thing needs to reach people who don’t hear it very often, and only hear the marketed anti-government, anti-democracy message that is spread by the corporations.  Did you know that Speak Out California also provides speakers to talk to local groups across California and do radio and TV interviews discussing the benefits of government and democracy? Please contact us at [email protected] to schedule a speaker for your event.

Click through to Speak Out California and leave a comment.