Tax Credits and Fraud

The relentless corporate pursuit of special tax breaks is bad for the fiscal health of cities and states, but it is usually completely legal. An exception to this rule is taking place in New Jersey, where a well-connected company has been the target of a criminal investigation.

Holtec International, the company in question, is involved in various energy-related businesses, including the decommissioning of defunct nuclear power plants. In 2014 it was the recipient of a $260 million tax-related subsidy from the Grow New Jersey Assistance Program to create jobs at a facility in the struggling city of Camden. As the advocacy group New Jersey Policy Perspective pointed out, the deal had weak provisions relating to local hiring, training programs and even the number of jobs the company would actually have to create to get the tax benefits.

Despite benefitting from that largesse, Holtec got itself in trouble when it allegedly tried to cheat a different tax incentive program, the Angel Investor Tax Credit. The company qualified for a credit based on a $12 million investment it made in the battery company Eos Storage. That credit is capped at $500,000.

According to the New Jersey Attorney General Matthew Platkin, Holtec sought to circumvent that limit by trying to make it appear that it and a related company called Singh Real Estate Enterprises had each separately invested $6 million in Eos and thus could each claim the $500,000 credit. Holtec allegedly did so by submitting misleading documents to the state’s Economic Development Authority (EDA).

In announcing the resolution of the case against Holtec, the AG recently said: “We are sending a clear message: no matter how big and powerful you are, if you lie to the State for financial gain, we will hold you accountable — period.”

Yet Holtec is getting off easy. The AG allowed the company to enter into a deferred prosecution agreement instead of facing criminal charges. Under that agreement, Holtec must pay $5 million in penalties, forgo the angel investor credit and retain an independent monitor to oversee future dealings with the state.

Instead of showing appreciation for the leniency agreement, Holtec issued a sharply worded statement alleging that the entire investigation was retaliation after the state failed in a previous legal action against the company relating to that $260 million subsidy deal. The EDA had sought to rescind the award because the agency said it belatedly discovered that the company’s original application had not disclosed a disciplinary action brought against it by the Tennessee Valley Authority. That action, a temporary debarment, stemmed from a case in which Holtec was linked to improper payments made to a TVA manager to help secure a contract.

Holtec’s claim that its failure to mention the TVA debarment was inadvertent was accepted by the New Jersey courts and the tax credit was upheld.

This entire episode should serve as a reminder of the drawbacks of a system in which companies come to believe they have an absolute entitlement to tax breaks—and states don’t do enough to monitor the eligibility of applicants and the compliance of recipients. It also raises the question of whether there is more fraud in the economic development subsidy system than we have assumed.

Corruption Galore

For those convinced of the depravity of large corporations and the super-wealthy, recent days have provided an abundance of vindication. Thanks to the whistleblower at Facebook and an anonymous leaker of a vast collection of confidential financial documents dubbed the Pandora Papers, we have amazing new evidence of corruption and anti-social behavior.

Frances Haugen’s release of internal research paints a picture of Facebook as prioritizing profits ahead of taking steps to address evidence that its algorithms promote social animosity and that its products such as Instagram exacerbate mental health problems among teenage users.

The financial documents revealed in the Pandora Papers depict numerous billionaires and government leaders around the world as brazen tax cheats who are accumulating immense amounts of illegal assets in the form of high-end real estate, yachts and secret bank accounts.

Of course, none of this comes as a surprise. In fact, this is not the first large-scale leak of private financial records showing misappropriation, money laundering and tax evasion among the global elite. We already knew that Facebook is basically unconcerned about the damage caused by its services.

As is always the case after major revelations like these, the main question is whether policymakers will do anything to address the problems. The odds that the Pandora Papers will prompt Congress to act are reduced somewhat by the fact that the disclosures do not include much about members of the U.S. elite. Major controversies have erupted in countries such as Jordan, Kenya and the Czech Republic, whose leaders are among those implicated in the documents. U.S. individuals consist mainly of lesser-known billionaires and art dealers.

Perhaps the most salient U.S. angle in the Pandora Papers is the increasingly important role played by states such as South Dakota as tax havens for elites seeking to shield illicit assets. To some extent this is an issue for state legislatures, though a bill has been introduced in Congress that would require trust companies and others to screen foreign clients seeking to move assets through the U.S. financial system.

There may be more policy momentum when it comes to Facebook. It and the other tech giants have been receiving criticism, for varying reasons, from members of Congress across the political spectrum. Along with the issues raised by the whistleblower, there are increasing concerns about the concentration of ownership within the tech sector. Among other things, Facebook is the subject of a new antitrust complaint by the Federal Trade Commission.

An article in the Washington Post quotes lawmakers suggesting that this may be tech’s “Big Tobacco moment,” a reference to the time in the late 1990s when the major cigarette manufacturers lost their stranglehold over public policy and ended up having to accept stronger federal regulation and paying out tens of billions of dollars in class action settlements.

It is good to hear that legislators are thinking in those terms, but they will have to turn up the heat much higher on Facebook, which so far is not admitting any culpability and whose CEO is too young to remember much about the 1990s.

Wage Reparations

Donald Trump got a lot of mileage during his presidential campaign from criticizing the poor record of wage growth during the Obama era. Since taking office he has done nothing to directly address the issue. In fact, his administration’s attacks on labor rights have made it more difficult for workers to push for higher pay through unions.

Instead, Trump and his Republican allies in Congress came up with the cynical ploy of promoting their massive corporate tax giveaway as an indirect way of boosting paychecks. The right has always tried to lure labor with the promise of higher net pay that would come from reduced withholding schedules. Yet this time the claim was that companies would respond to reductions in their tax liabilities by boosting gross pay.

From the perspective of labor market dynamics, this made no sense whatsoever. There is no direct tie between corporate tax rates and wage levels. Most of the U.S. public seemed to understand this and expressed little enthusiasm for the tax bill.

Now, however, selected corporations are in effect colluding with Trump by announcing selective wage increases that they claim are inspired by the corporate tax reductions. Walmart is the latest and largest of the employers to play this game with plans to increase starting wages for its “associates” to the princely sum of $11 an hour. Some employees will be awarded one-time bonuses ranging from $200 (for those on the job for less than two years) to $1,000 for those hardy souls who have stuck it out for 20 years.

This plan, like the ones announced by the likes of AT&T and Wells Fargo, is far from a market response to lower taxes. These companies are no doubt using the increases to curry favor with the White House in the hope of better outcomes in their federal regulatory problems.

Then there’s the fact that these are increases that Walmart in particular had to make in response to previous wage hikes at its competitors. Even so, Walmart’s increases will leave many of its employees short of a living wage.

Another reason to doubt these moves are tax-inspired acts of generosity is that the companies involved each have a history not only of keeping wages down but of taking steps to deny workers the full pay to which they were entitled. In other words, all three have a history of wage theft.

Walmart, of course, was long the most notorious employer in this regard. It found myriad ways to get employees to work off the clock, thus violating the minimum wage and overtime provisions of the Fair Labor Standards Act. In the late 2000s Walmart was fined $33 million by the Department of Labor’s Wage and Hour Division and paid out hundreds of millions of dollars more to settle a slew of private collective-action lawsuits.

AT&T and its subsidiaries have paid out more than $80 million to settle about a dozen similar wage and hour and misclassification cases.  Wells Fargo and its subsidiaries have paid more than $120 million in at least 17 cases.

These settlements provided some necessary relief, but the amounts probably don’t begin to approximate the full extent to which the companies shortchanged their workers.

Consequently, whatever voluntary pay increases the companies are offering now can be seen as additional reparations for their past sins of wage theft.

If the management of Walmart really wanted to solve its compensation shortcomings once and for all, it would at long last recognize the right of its workers to form a union and bargain collectively.

Note: the litigation figures cited here come from data being collected for a forthcoming expansion of Violation Tracker.

The Corporate Crook Conquest of the Executive Branch

It appears that the Trump Administration will not rest until every last federal regulatory agency is under the control of a corporate surrogate. The reverse revolving door is swinging wildly as business foxes swarm into the rulemaking henhouses.

Among the latest predators is Alex Azar II, who was just nominated by Trump to head the Department of Health and Human Services, a position Tom Price had to vacate amid the uproar over his excessive use of chartered jets for routine government travel. Until earlier this year Azar was the president of the U.S. division of pharmaceutical giant Eli Lilly.

Azar apparently shares Price’s abhorrence of the Affordable Care Act, but he also brings the perspective of a top executive for a drug company with a particularly sordid track record. For the past 40 years Lilly has been embroiled in a series of scandals involving unsafe products and the marketing of drugs for unapproved uses. Among the many cases were some that involved criminal charges.

In 1985 Lilly pleaded guilty to charges that it failed to notify federal regulators about deaths and illnesses linked to Oraflex.  The company’s former chief medical officer entered a plea of no contest to similar individual charges. A Justice Department report put the number of deaths the company had covered up at 28.

In 2009 the U.S. Justice Department announced that Lilly had agreed to pay a $515 million criminal fine as part of the resolution of allegations relating to the illegal marketing of its schizophrenia drug Zyprexa.

The company has also faced bribery allegations. In December 2012 the U.S. Securities and Exchange Commission announced that Lilly would pay a total of $29.4 million to resolve charges that some of its subsidiaries violated the Foreign Corrupt Practices Act by making improper payments to win business in Russia, Brazil, China and Poland.

Violation Tracker’s tally on Eli Lilly amounts to $1.49 billion in penalties since 2000.

Meanwhile, the Senate has confirmed (along party lines) the Trump Administration’s nomination of coal mining executive David Zatezalo to head the Mine Safety and Health Administration. For seven years Zatezalo served as chairman of Rhino Resource Partners, where he clashed with MSHA over the company’s safety problems. The agency issued two rare “pattern of violation” warnings against the company. Violation Tracker contains 160 cases involving Rhino with total penalties of more than $2 million.

And given the headlong rush by Congressional Republicans to pass their tax legislation, it should be noticed that the Trump Administration’s interim head of the Internal Revenue Service (following the resignation of John Koskinen, who had been named by Obama) is David Kautter, who spent most of his career at the accounting firm Ernst & Young, which now prefers to be called EY.

Kautter was in charge of the tax compliance department at Ernst, which to a great extent meant helping clients dodge their fiscal obligations. In 2013 the firm had to pay $123 million to settle federal criminal charges of wrongful conduct in connection with illegitimate tax shelters (it was offered a non-prosecution agreement).

The phrase regulatory capture used to refer to tendency of agencies to gradually become more sympathetic to the needs of the industries they were supposed to oversee. Under Trump that process has been accelerated, with regulatory posts being given to individuals who are already corporate insiders or shills for the worst the business world has to offer. More than regulatory capture, it is the corporate crook conquest of the executive branch.

Tax Dodgers and Regulatory Scofflaws

Large corporations in the United States like to portray themselves as victims of a supposedly onerous tax system and a supposedly oppressive regulatory system. Those depictions are a far cry from reality, but that does not stop business interests from seeking to weaken government power in both areas.

This year has been a bonanza. The Trump Administration and Congressional Republicans have taken aim at numerous Obama-era regulatory initiatives and now are serving up a banquet of business tax breaks.

At the same time, corporations take matters into their own hands by using every opportunity to circumvent tax obligations and regulatory safeguards. The newly released Paradise Papers are just the latest indications of how large corporations such as Apple (and wealthy individuals) use offshore havens to shield billions of dollars in profits from taxation.

The Institute on Taxation and Economic Policy has published a list of more than 300 Fortune 500 companies that hold some $2.6 trillion offshore, thereby avoiding about $767 billion in federal taxes. Of these, ITEP has found indications that 29 corporations keep their holdings not only outside the United States but in tax haven countries where they pay very little in local taxes.

It should come as no surprise that quite a few of these tax dodgers also show up high on the list of regulatory scofflaws documented in Violation Tracker. In fact, one of the 29 is Bank of America, which has racked up $57 billion in fines and settlements since 2000 — far more than any other corporation. ITEP reports that B of A has $17.8 billion in unrepatriated income.

Also on the ITEP list is Citigroup, with $47 billion in unrepatriated income. It ranks 5th on the Violation Tracker list, with more than $16 billion in fines and settlements. Wells Fargo has $2.4 billion in unrepatriated income and $11 billion in penalties, but that latter figure is likely to rise as various cases relating to the bank’s bogus account scandal are resolved.

Banks are not the only overlaps between the two lists. For example, pharmaceutical company Amgen has $36 billion in unrepatriated income and $786 million in penalties.

Major regulatory violators can also be found on the larger list of corporations that are known to have large offshore holdings but do not disclose enough information to allow ITEP to determine whether those holdings are in tax havens. Chief among these are other pharmaceutical giant such as Pfizer ($197 billion offshore and $4.3 billion in penalties), Johnson & Johnson ($66 billion offshore and $2.5 billion in penalties), Merck ($63 billion offshore and $2 billion in penalties) and Eli Lilly ($28 billion offshore and $1.4 billion in penalties).

Also on the list are petroleum majors such as Exxon Mobil ($54 billion offshore and $714 million in penalties) and Chevron ($46 billion offshore and $578 million in penalties).

The mindset that prompts corporate executives to use international tax dodging techniques seems to be related to the one that encourages them to break environmental, consumer protection and other laws at home. The logical course of action would be to tighten both tax and regulatory enforcement, but those currently in charge of federal policymaking instead want to make it even easier for large corporations to make out like bandits.

A Windfall for the Forbes 400 and the Fortune 500

We now know who it was Donald Trump was really addressing in his convention speech last summer when he declared “I am your voice”: the Forbes 400 and others in the upper reaches of the 1 Percent.

The one-page tax outline just released by the Trump Administration — with its pass-through scheme, its radical reduction in statutory corporate tax rates, and its elimination of the alternative minimum tax, the estate tax and taxation of overseas business profits — provides an unrestrained windfall for Trump’s own billionaire class.

In defiance of all evidence, Treasury Secretary Mnuchin is insisting that this is not a giveaway to the rich but instead is “all about jobs, jobs, jobs.” This is the same official who, harking back to the snake oil of the Reagan Administration, insists that the tax cuts will “pay for themselves.”

The claim that the corporate tax cuts will boost the economy and job creation is based on the widely promoted but largely baseless claim that U.S. business is burdened with excessively high rates. As groups such as the Institute on Taxation and Economic Policy have repeatedly shown over the years and which ITEP documents once again in a recent report, many large corporations pay effective tax rates far below the 35 percent statutory rate. And through the aggressive use of tax avoidance techniques, quite a few of those manage to bring their effective rate down to zero or less.

Even if one accepts the questionable connection between taxes and job creation, Trump’s proposal would have no effect on employment in sectors such as utilities, industrial machinery, telecommunications and oil & gas, which ITEP shows are already paying effective rates below 15 percent.

There are sectors currently paying rates well above 15 percent, but it is not clear that lower taxes would do much to create jobs — and even less so, good jobs. One of the highest effective rates can be found in the retail sector, which despite this supposed burden, has over the year added millions of jobs. Unfortunately, most of those positions are substandard. The typical retail wage is about a third lower than the average for the private sector as a whole.

Recently, retail employment has been falling, but this has nothing to do with taxes; it’s the result of the increasing number of people buying stuff online rather than from brick-and-mortar stores. Giving big tax cuts to Wal-Mart and Dollar General will not reverse the job loss nor will it improve the wages of their remaining workers.

It’s also unclear what benefits will come from reducing taxes on health care companies, which also pay effective rates close to the statutory level. Taxes have not stood in the way of massive employment growth in this sector, which on the whole pays better than retail but has a substantial number of low-wage jobs. The future of this sector depends not on taxes but instead on whether Trump and Congressional Republicans succeed in dismantling the Affordable Care Act.

Another part of the Trump outline that will do little to create good jobs is the call for the repatriation and light taxation of foreign profits that corporations have been parking overseas. Business apologists have long made extravagant claims for this policy, but previous experiments with repatriation holidays did not boost jobs or even investment and instead simply fattened profits and dividends.

Those who put together the Trump tax outline are either oblivious to the discussion in recent years about growing income and wealth inequality or they deliberately set out to make the problem much worse. In either event, the plutocrats are rejoicing.

Corporate Criminals and Public Office

Donald Trump’s candidacy is based to a great extent on the notion that a successful businessman would make an effective President. Democrats have shot holes in Trump’s claims of success, but they have not done enough to attack the underlying claim that private sector talents are applicable to the public realm.

The conflation of business and government acumen is all the more dangerous at a time when the norm in the corporate world is increasingly corrupt. The observation by Bernie Sanders during the primaries that “the business model of Wall Street is fraud” applies well beyond the realm of investment banking. Have those calling for government to operate more like business been paying attention to Wells Fargo, Volkswagen and EpiPen-producer Mylan?

It used to be that the main threat was that unscrupulous corporations would use investments in the political and legislative process to bend policymaking to favor their interests. Trump has shown that a corporate miscreant can use a pseudo-populist platform to try to take office directly.

Trump is not unique in this regard. Take the case of West Virginia, where a controversial billionaire coal operator is leading the polls in the state’s gubernatorial race. Jim Justice brags that he is a “career businessman” not a career politician, yet that career includes racking up some $5 million in fines imposed by the Mine Safety and Health Administration, according to Violation Tracker. To make matters worse, NPR and Mine Safety News reported in 2014 that Justice resisted paying these fines. An NPR update says that $2.6 million in MSHA fines and delinquency penalties remain unpaid even as the Justice mining operations continue to get hit with more safety violations.

On top of this, NPR estimates that the Justice companies face more than $10 million in federal, state and county liens for unpaid corporate income, property and minerals taxes. About one-third of the total is owed to poor West Virginia counties. Like Donald Trump, Justice has failed to follow through on charitable commitments yet has managed to pump several million dollars into his campaign.

Did I mention that Justice is the Democratic candidate?  He is not, however, supporting Hillary Clinton though he is tight with conservative Democrat Sen. Joe Manchin. Justice’s Republican opponent is state senate president Bill Cole, whose super PAC received a $100,000 contribution from a super PAC funded by the Koch brothers. This was after Cole spoke at the Koch’s private conservative donors conference in Palm Springs last February, reportedly using his remarks to emphasize his commitment to getting a “right to work” law passed in West Virginia. While in the legislature Cole has also been cozy with the American Legislative Exchange Council and has pushed the crackpot supply-side economic prescriptions of Arthur Laffer. Cole is also an enthusiastic supporter of Trump.

It is difficult to know which is worse: a candidate in the pocket of unscrupulous corporate special interests or one who is himself one of those corporate miscreants. It is troubling to think that our elections increasingly come down to such an untenable choice.

Trump’s Accountant, Bogus Tax Shelters and My Lost Inheritance

Jack Mitnick

Jack Mitnick may end up denying the presidency to Donald Trump. He also helped deprive me of my inheritance.

As the world now knows, the accountant confirmed to the New York Times the authenticity of leaked Trump tax return documents prepared by him that reported an annual loss of some $916 million in 1995 that may have allowed the mogul to avoid federal taxes for nearly two decades.

Trump was not Mitnick’s only client in the 1990s. He and his firm Spahr Lacher & Sperber also did work for my maternal grandfather Julius Nasso, who owned a concrete construction company in New York City. That firm did quite well for its work on projects such as Madison Square Garden and the Javits Convention Center.

My grandfather, who died in 1999, prospered from the business, but his wealth, I regret to say, was also enhanced through the use of dubious tax shelters involving coal leases. That’s where Mitnick comes in. From what I know, Mitnick’s firm either set up my grandfather in the shelters or at least prepared tax returns in which they were used to greatly reduce his tax liabilities.

The Internal Revenue Service eventually challenged the shelters, but my grandfather, apparently with Mitnick’s help, refused to settle. It was only after his death that the dispute was resolved by my family with a substantial payment to the IRS. One consequence of this was that the bequests in his will to me and the other grandchildren could not be fulfilled.

I long treated this as a private family matter, but after Mitnick’s name appeared in the Times story I did some research on him. I found that in 1981 Mitnick and other parties were sued by William Freschi Jr. in his role as trustee of the estate of his father, who like my grandfather had invested in coal lease tax shelters. The suit accused Mitnick, who was described as the administrator of Grand Coal Venture, and others of defrauding his father.

The case had a long and complicated legal history, including a racketeering charge and an action by the U.S. Supreme Court. In 1985 Mitnick and the other defendants were found guilty of securities fraud and ordered to pay Freschi $266,500 in damages, plus $126,681.75 in pre-judgment interest. The Court of Appeals, however, later overturned the award against Mitnick but did not completely exonerate him.

Given Mitnick’s close working relationship with Trump — the accountant is mentioned in The Art of the Deal — one cannot help wonder whether he also arranged for Trump to participate in the phony coal tax shelters. Given the other tax dodging tricks available in connection with his real estate holdings, Trump may not have needed them, but this is another question that will be answered only when Trump releases his full tax returns.

In the interest of full disclosure, I should mention that my grandfather’s company operated at times in a joint venture with S&A Concrete, a firm with alleged mob connections that separately did substantial business on Trump projects.

Putting Apple in Its Place

bad-appleApple’s indignant response to the European Commission tax ruling has nothing to do with an inability to pay. The company’s cash pile of more than $200 billion could cover the assessment several times over. Instead, it’s something more akin to the attitude attributed to the late New York hotelier Leona Helmsley: only the little people pay taxes.

Large corporations like Apple think that what they do is so important that they should be able to skirt their fair share of taxes. Some of their dodging is covert and some is done brazenly out in the open; some is done against the wishes of tax collectors and some is done with their full cooperation.

The covert portion of Apple’s tax avoidance started to come to light in 2012, when the New York Times published an investigation of the company’s use of esoteric accounting devices such as the “Double Irish With a Dutch Sandwich” to route profits in ways that minimized tax liabilities or eliminated them entirely. A year later, the Senate’s Permanent Subcommittee on Investigations issued a report providing additional details on Apple’s tax tricks. It also held hearings in which Apple CEO Tim Cook insisted what the company was doing was simply “prudent” management while Kentucky Sen. Rand Paul brought shame on himself by declaring that Apple was owed an apology.

While Congress has done little to thwart corporate tax dodging, the EC used the Senate report to launch an investigation of Apple that resulted in the recent ruling. Now some members of Congress are making fools of themselves by protesting that ruling.

As Apple’s global tax dodging has gotten the most attention, the company has been able to avoid some domestic taxes with much less bother. That because states and localities routinely offer the kind of special tax deals to individual companies that are banned in Europe, more so now that Ireland’s attempted end-run was rejected.

This is seen most clearly in the subsidy packages that Apple and other tech giants such as Facebook and Google receive when they build new data centers necessary to handle the ever-increasing volume of human activity taking place in “the cloud.” Although the decision as to where to locate the facilities is based primarily on considerations such as the availability of low-cost energy (data centers are power hogs), these companies want to receive large amounts of taxpayer assistance.

As my colleague Kasia Tarczynska points out in a forthcoming report on the subject, companies such as Apple regularly negotiate subsidy packages and special tax breaks worth hundreds of millions of dollars for data centers that typically create only a few dozen jobs.

In North Carolina, Apple successfully pressured the state to allow it to calculate its income taxes through a special formula that will save the company an estimated $300 million over the 30-year life of the agreement. Local officials provided property tax abatements worth about $20 million more. All this for a project that was to create only about 50 permanent jobs. Despite its $1 billion cost, the facility did little to boost the local economy. “Apple really doesn’t mean a thing to this town,” a resident told a reporter in 2011. Apple went on to receive generous subsidy packages for additional data centers in Oregon and Nevada.

Apple’s various forms of tax avoidance are reminders that large corporations, even those that profess to have enlightened social views, don’t have respect for government and resent having to follow its rules. Rather than pay taxes and follow regulations, they prefer to make charitable contributions and undertake corporate social responsibility initiatives. In other words, they want to do things on their own terms and not comply with the same obligations as everyone else. Kudos to Europe for beginning to put Apple in its place.

The Wrongs of States’ Rights

The publication of the Panama Papers is a bombshell, though the fallout is being felt much more in countries such as Iceland than in the United States. It’s true that the revelations about offshore tax havens have mentioned domestic counterparts such as Delaware, Nevada and Wyoming, but officials in those states don’t seem to think that any action needs to be taken. As the headline of an article in the BNA Daily Tax Report put it: STATES GIVE GROUP SHRUG TO PANAMA PAPERS.

One reason for the tepid reaction is that the criticisms have been heard before. As BNA points out, a 2006 report from the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) listed the three states as being especially appealing to those seeking to create shell companies.

Another basis for complacency by the states is that their practices are part of a long and unfortunate tradition in the United States politely called federalism, but which is really a race to the bottom when it comes to oversight of corporations and the wealthy.

This trend dates back to the 19th Century, when the efforts of tycoons such as John D. Rockefeller to create vast industrial empires came up against the fact that state laws governing corporate charters put restrictions on the size and scope of a corporation’s activities, including the ownership of out-of-state companies. Rockefeller’s flagship firm Standard Oil of Ohio tried to get around this by creating the Standard Oil trust, in which affiliates were nominally independent but were actually controlled by a centralized board chosen by Rockefeller. Similar trusts were created in a variety of other industries.

Standard Oil’s transparent effort to circumvent state law was eventually struck down by the Ohio Supreme Court, but by that time Rockefeller and other robber barons had a new tool at their disposal: the willingness of some states to water down their chartering regulations to make them more attractive to big business.

The pioneer of this practice was New Jersey, which adopted a series of legislative measures from the 1870s through the 1890s to make its regulations more business-friendly. During this period, New Jersey became the destination of choice for trusts looking to legitimize themselves by reincorporating in a state that had no problem with bigness. That position was reinforced after Standard Oil made the Garden State its new base of operations. Muckraker Lincoln Steffens took to calling New Jersey the “traitor state.”

Other states sought to get in on this action. In 1899 Delaware adopted a corporation law that was even looser than New Jersey’s and had lower incorporation fees and franchise taxes. After New Jersey later changed course and went back to stricter corporation laws, it was Delaware that became the new mecca of corporations and has remained so to the present day.

Looser chartering procedures not only helped large corporations get larger but also made it easier for both businesses and wealthy individuals to set up the kind of shell companies highlighted in the Panama Papers. The ability and willingness of states to compete with one another to offer the most corporate-friendly practices goes well beyond company formation and governance.

Two areas in which the effects have been most pernicious are economic development and labor relations. Starting in the 1930s but especially during the past few decades, states have been willing to hand over larger and larger “incentive” packages to corporations to lure investments.  For example, in 2014, following a multi-state competition, tax haven Nevada gave away nearly $1.3 billion in taxpayer revenue to get Tesla Motors to locate an electric-car battery plant in the state.

Some states also lure companies with the promise of weak or non-existent labor unions. Ever since the Tart-Hartley Act of 1947, states have had the right to enact laws outlawing union security provisions in collective bargaining agreements. These so-called right-to-work laws tend to weaken the ability of unions to organize while saddling existing unions with lots of free riders who don’t contribute to the cost of running the organization.

It’s widely understood that the notion of states’ rights is often a smokescreen for racial discrimination, but it’s also part of what enables other retrograde practices such as union-busting, corporate welfare and tax dodging.