Archive for November, 2011

Guest Post: State and Local Subsidies to Business More Out of Control than Ever

November 28, 2011

guest post by Kenneth Thomas from his Middle Class Political Economist blog

I’ve just completed a new paper (not yet published, so I can’t present it all here) showing the effectiveness of the European Union’s rules to control investment incentives. Comparing U.S. bidding wars for investment with what happens under the EU’s state of the art rules (see below) helps show just how much money is wasted by state and local governments here. As I have posted here before, the annual subsidies given could hire all laid-off state and local government workers. In this post, we examine incentives over $100 million as well as the top 25 incentives since 2000 in both the EU and U.S.

Since the beginning of 2010, there have been at least 20 $100 million incentive packages given in the U.S., compared to just four in the EU. This includes a $1 billion package (present value) given by the state of Michigan to Chrysler in 2010. By contrast, the largest package in the EU in this time was about $285 million. Overall, nine of the top 25 investment subsidies given since 2000 have been given in 2010 and 2011. This is twice as many as you would expect randomly (25*2/11=4.5), which suggests to me that things are more out of control than ever.

An important metric for comparing the size of incentives is what the EU calls “aid intensity,” which is the subsidy divided by the investment. This lets you compare incentives for projects of different sizes. Under the EU’s current rules for large investments, which came into effect in 2002, the largest subsidy by aid intensity was 23.19%, a $161 million package that went to Ford Craiova in Romania in 2008. Of the top 25 packages in the U.S. since 2000, only three had a lower aid intensity than Ford Craiova, one was about equal, and the rest were higher, including four over 100%, with one as high as 385%, almost four times the cost of the investment! Thus, the highest aid intensity in the EU was virtually the lowest aid intensity for large projects in the U.S. And EU rules limit the highest subsidies to the poorest regions; the higher the GDP per capita, the lower the maximum allowable incentive, with the richest regions not allowed to give investment incentives at all.

What the EU originally called the Multisectoral Framework on Regional Aid to Large Investment Projects came into effect in 1998, and in 2002 the rules were tightened to sharply reduce the maximum subsidy the European Commission would allow* for investment projects over € 50 million. This can be clearly seen in a list of the top 25 incentives in the EU (you’ll have to wait for the paper, or see Table 6.2 in Investment Incentives and the Global Competition for Capital as the top five have not changed since the book was published), where four of the five largest were given before the 2002 reform. Similarly, companies that received incentives under both the original rules and the reformed rules received much lower aid intensity under the new rules. For example, Advanced Micro Devices received a subsidy equal to 22.67% of its investment to locate in Dresden, Germany, in 2004 under the old rules, but only 11.9% in Dresden under the new rules in 2007, and 10.83% when its joint venture, Global Foundries, set up shop in Dresden in 2011. The rule change clearly worked to ratchet down incentives.

The European Union rules show that there is an alternative to giving large incentives to attract investment, that there is no reason to give away free factories to rich companies. But even in rich areas of the U.S., government officials do not want to give up their subsidy powers, so it will take constant political pressure to obtain what is ultimately a federal solution. The only way to make this politically feasible is through constantly reminding people of the high costs, what we have to give up to pay them, and pointing out feasible alternatives.

* Yes, you read that right. In the EU, the 27 independent Member States can only give a subsidy to a business if the European Commission authorizes them to do so.

$100 Billion Verizon is one of Country’s Most Aggressive Tax Dodgers

November 15, 2011

A new report released today reveals how Verizon Communications achieves a negative federal tax rate to avoid paying its fair share of taxes, and aggressively uses tax loopholes and subsidies to cut its tax bills even more.

Unpaid Bills: How Verizon Shortchanges Government Through Tax Dodging and Subsidies,” was produced by Citizens for Tax Justice and Good Jobs First, and released by the two organizations and the Communications Workers of America. The report shows that Verizon, a $100 billion dollar corporation, paid an effective federal tax rate of –2.9 percent between 2008 and 2010. For the year 2010 alone, Verizon’s federal tax rate was -5.7 percent. While most Americans are struggling to make ends meet and pay their fair share of taxes, Verizon actually received a federal tax rebate of nearly $1 billion rebate from the United States Treasury.

The report is especially timely as the congressional “super committee” meets on budget and tax issues. Verizon has put the “Reverse Morris Trust” tax loophole to extensive use, avoiding $1.5 billion in taxes on the sale of its landlines and other assets, said CWA chief of staff Ron Collins.

“Verizon doesn’t use its tax avoidance gains to keep up its copper network or extend its fiber optic technology to cities like Boston, Baltimore, Buffalo or other communities or create quality jobs. It isn’t negotiating a fair contract with the workers who have made this company so successful but instead is demanding nearly $1 billion in givebacks and making sure that its top executives stay in the top 1 percent of Americans. That’s why we say ‘the 99 percent’ are picking up Verizon’s tax tab,” Collins said.

Earlier this month, CTJ placed Verizon as one of the nation’s top tax avoidance offenders, manipulating state revenue rules, seeking economic development subsidies, and structuring its business and tax affairs to produce a negative federal income tax rate. Verizon has received state and local tax subsidies in at least 13 states.

Robert McIntyre, director of CTJ and the report’s lead author, said the billions of dollars that companies like Verizon receive are simply “wasted dollars, that could have gone to protect Medicare, create jobs and cut the deficit. Too many corporations are gaming the system at the expense of the rest of us.”

Philip Mattera, research director of Good Jobs First, said Verizon and other tax dodgers “aren’t using these tax givebacks to create good jobs or invest in their companies in ways that would improve our communities. Ordinary Americans are struggling to pay their own taxes and are picking up the tab for these corporations as well. It’s a system out of control.”

Most Texas Enterprise Fund Job Grantees Failed to Deliver in 2010

November 9, 2011

Source: Texans for Public Justice, 2011.

A new Texans for Public Justice report (available here) finds that most of Governor Rick Perry’s Texas Enterprise Fund (TEF) projects failed to deliver on their 2010 job promises. The study analyzes compliance reports filed by 65 companies that received $350 million to create Texas jobs in 2010.

“Governor Perry’s jobs’ stimulus program is a classic example of government waste, fraud and abuse,” said Texans for Public Justice Director Craig McDonald. “The Enterprise Fund has an alarming rate of defaulting on the Governor’s jobs promises.”

A summary that Governor Perry’s office published in August suggests that $440 million in taxpayer TEF grants have created 59,600 Texas jobs. Perry claimed in an October presidential debate that TEF has produced 54,600 jobs. Putting aside five TEF projects that TPJ asserts are fraudulent job claims and a sixth project that appears to be undergoing an audit, TPJ found evidence that TEF had created 22,349 jobs by the end of 2010. That number amounts to 37 percent of the job claims made by the Governor’s Office.

Analyzing the 65 TEF projects, the new report found that:

  • 24 projects (37 percent) failed to deliver on their original 2010 job promises;
  • 17 projects (26 percent) complied with their 2010 job commitments;
  • 11 failing projects were terminated prematurely (17 percent);
  • 7 projects are troubled (11 percent), usually because they defaulted on 2010 job pledges but covered the shortfall with job credits earned by exceeding their job targets in past years;
  • 5  projects (8 percent) were found by TPJ to fraudulently claim that they created more jobs than they actually did (this category includes most of TEF’s largest grants); and
  • One project claimed “new” jobs that had hiring dates predating its TEF contract.

“Story of Broke” Says We’re Not Broke, Just Misspending

November 8, 2011

“Story of Stuff” phenom Annie Leonard is out this morning with a terrific new video just in time for the “Supercommittee” debate over the federal budget deficit.

Leonard is ticked off that the deficit is being used to argue that good schools, a clean energy economy, good healthcare and the whole American Dream promised by politicians is no longer possible. Pushing back with her own budget analysis, “The Story of Broke” argues that “we aren’t broke,” we are just still spending far too much on “the dinosaur economy,” subsidizing Big Oil and petrochemicals, cheap mining on federal lands, the risk of a nuclear meltdown. and tax breaks for the wealthy and corporations with the most lobbyists.

Pointing out what could be done with dino-subsidies, Leonard makes it clear that subsidies for new green jobs in renewable energy—along with zero-waste production, conversion away from petrochemicals to bio-based materials, and higher recycling rates—could create lots of jobs and help restore the tax base for education, Medicare and other vital public services.

For another caffeinated dose of Annie Leonard’s inspiration—and Free Range Graphic’s tart illustrations of her argument—check it out here

Study: Poverty Wages at BWI Create Hidden Taxpayer Costs

November 7, 2011

Many workers providing food and retail service at Baltimore Washington International Thurgood Marshall Airport (BWI) are paid so little that they and their families depend on Medicaid, the Maryland Children’s Health Program, and food stamps, according to a study released today.

The study, entitled “Behind the Counter at BWI: Engine of Development or Pocket of Poverty?” was issued today by Good Jobs First at

“Maryland taxpayers have already paid enormous sums to build, maintain and operate the state’s largest airport,” said Greg LeRoy, the report’s author and Good Jobs First’s director. “But hundreds of workers there remain mired in poverty wages and scant benefits that force them and their families to depend on social safety-net programs, creating hidden taxpayer costs.”

The study is based upon a survey of 175 non-union, non-supervisory food and retail workers at BWI. It finds that:

  • Typical pay is just $8.50 an hour for 36 hours per week—or just $15,912 a year—below the federal poverty line for a small family and far below a more realistic bare-subsistence budget published by Wider Opportunities for Women.
  • Almost two in five workers have no health insurance coverage at all, and of those with coverage, two in five depend on Maryland Medicaid.
  • Although seven-eighths of those workers with children report having them covered, almost two-thirds of those are dependent upon the Maryland Children’s Health Program (MCHP). (Both Medicaid and MCHP are state-administered and funded with federal and state dollars.)
  • More than one-sixth receive food stamps at an average rate of $300 per month.

Large, Profitable Corporations Get Huge Federal Tax Breaks

November 4, 2011

The most consistently profitable companies in the Fortune 500 only pay about half the statutory federal income tax rate—a fourth pay less than 10 percent. Some even get refunds from Uncle Sam—30 companies have enjoyed a negative income tax rate the past three years despite making $160 billion in pre-tax profits.

It’s the definitive study that punctures calls for a cut in the federal income tax rate on corporations, provided yesterday by Citizens for Tax Justice and the Institute on Taxation and Economic Policy (CTJ and ITEP) in “Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010.”

Looking at shareholder filings for those Fortune 500 companies that reported profits in each of the three years, CTJ and ITEP found that 280 companies paid an average effective rate of just 18.5 percent and for the last two years only 17.3 percent, less than half the statutory rate of 35 percent.

The study catalogs the underlying causes, many of which have eroded progress in the federal tax code made in the 1986 reform act that plugged many loopholes: accelerated depreciation, stock options, industry-specific tax credits, and offshore tax sheltering.

Bottom line, it’s why federal corporate income taxes have plummeted as a share of GDP from almost 4 percent in the 1960s to just over 1 percent today. And a key reason, CTJ director Bob McIntyre argues, why any corporate tax reform should not be “revenue neutral” but should instead plug loopholes and restore balance.

For those of us who follow companies that aggressively seek state and local economic development subsidies, including avid users of Subsidy Tracker, there are familiar names among the low-tax rate/high-tax break crowd, like Boeing, Walmart, and Goldman Sachs.

Indeed, CTJ and ITEP will soon release a follow-on study looking at state taxes paid by the Fortune 500. Although publicly traded companies only report such taxes in one aggregate 50-state number, the finding will show how tax exemptions and credits cut the actual tax rate companies pay (along with loopholes like Passive Investment Companies and failed giveaways like Single Sales Factor).

For a primer on how companies dodge state income taxes, see chapter 4 of The Great American Jobs Scam, and for a summary of how corporate tax dodging has shifted the burden for public services onto working families, see chapter 8.

Finally, the study also punctures the argument that the U.S. has to lower its corporate tax rates because of lower rates offshore. Of those companies among the 280 with significant foreign profits, they paid foreign tax rates almost a third higher than their domestic rates. It argues that “closing the loopholes will have real benefits, including a fairer tax system, reduced federal budget deficits, and more resources to pay for improving our roads, bridges and schools — things that really are important for economic development here in the United States.”