On Corporate Socialism - by David Cay Johnston

  David C Johnston
How corporate socialism destroys
By David Cay Johnston *
Reuters.com
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 Thomas of 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 Center 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 last month his 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 Center 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 Center 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 warned that 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.

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* Reuters columnist, David Cay Johnston, is the president of Investigative Reporters & Editors (IRE), an education organization with 4,200 members. Mr. Johnston is a 13 year veteran of the New York Times, and a 2001 Pulitzer Prize winner for enterprise reporting on loopholes and tax inequities of the U.S. tax code.