Tax avoidance/evasion

UBS’s Ill-Fated Quest for Financial Glory

UBS UBS seems to be in the news these days more often in connection with its legal problems than in its role as a major financial services company.

This is a result both of some dubious cases brought against it and numerous instances of serious misconduct on the part of the Swiss company. UBS, after all, a corporation that not long ago had to pay $1.5 billion to settle charges that it helped manipulate the LIBOR interest rate index.

In the dubious category is a case brought by a group of its U.S. customers who tried to collect damages from the bank after it had revealed their secret accounts and they had to pay hefty penalties to avoid tax evasion charges for unreported income. A U.S. appellate court in Chicago recently upheld a lower court’s dismissal with a ruling that was, in more than one sense, dismissive. U.S. Circuit Court Judge Richard Posner wrote that UBS “has no duty to treat [the plaintiffs] like children or illiterates, and thus remind them that they have to pay taxes on the income on their deposits.” Posner went on to state: “This lawsuit, including the appeal, is a travesty. We are surprised that UBS hasn’t asked for the imposition of sanctions on the plaintiffs and class counsel.”

This is not to say that UBS was blameless. The lawsuit came after a former UBS banker turned whistleblower had revealed how the bank actively assisted wealthy Americans seeking to hide income from the IRS. Federal prosecutors targeted UBS, which in 2009 had to pay $780 million and sign a deferred prosecution agreement to settle criminal charges of having defrauded U.S. tax authorities.

The feds then pressured UBS to hand over account information on more than 50,000 U.S. customers. UBS and the Swiss government, seeking to retain the country’s tradition of bank secrecy, resisted but in the end agreed to spill the beans on a smaller group of depositors. Using that information, the IRS went after a bunch of those tax dodgers, some of whom then foolishly thought they could use the courts to get UBS to cover their tax bills.

UBS recently prevailed in another lawsuit filed in response to a different instance of its misconduct. In 2004 the U.S. Federal Reserve fined the bank $100 million for violating U.S. trade sanctions by engaging in currency transactions with parties in countries such as Iran and Libya. Based on that, a group of Americans who had been injured in Hamas and Hezbollah attacks while in Israel sued UBS in 2008 under the Anti-Terrorism Act, arguing that the bank was liable for damages in light of its dealings with Iran, which is said to back those groups. The U.S. appeals court in New York has just upheld a dismissal of the case, though it ruled that the trial judge was wrong in holding that the victims lacked standing to bring the action in the first place.

UBS’s success in these two cases pales in comparison to the damage that its reputation has suffered both from the larger matters that prompted them and from a series of other scandals that have embroiled the company through most of the 15 years since it was created from the merger of two of Switzerland’s three big banks: Swiss Bank Corporation and Union Bank of Switzerland.

After the deal was completed, UBS’s chief executive at the time, Marcel Ospel, set out on an ambitious mission to make the company the world leader in investment banking. It was an ill-fated quest.

When UBS sought to increase its U.S. presence with the acquisition of brokerage house PaineWebber, it inherited a slew of legal problems relating both to PaineWebber’s own deceptive practices in the sale of limited partnerships and those the U.S. firm in turn took on when it bought Kidder Peabody, including a scandal in which a trader fabricated $350 million in trading profits to hide what were actually huge losses.

UBS’s U.S. operation was later caught up in the controversy over conflicts of interest between research and investment banking (UBS paid $80 million as its share of the settlement) and was sued by several U.S. state governments relating to its sale of auction-rate securities. UBS settled the actions by agreeing to pay a total of $150 million in penalties to the states and buy back more than $18 billion of the securities.

After getting bailed out to the tune of some $65 billion by the Swiss government during the financial meltdown in 2008, UBS had to pay $160 million to settle federal and state charges relating to bid-rigging in the municipal securities market. Just after that, UBS was sued by the Federal Housing Finance Agency in an action seeking to recover more than $900 million in losses suffered by Fannie Mae and Freddie Mac from mortgage-backed securities purchased through UBS. (The case is pending.)

UBS faced criticism in 2011 after it came to light that a young trader named Kweku Adoboli working in the bank’s London offices had racked up more than $2 billion in losses. Adoboli was later found guilty of fraud and sentenced to seven years in prison, while UBS was fined £29 million by British regulators for supervisory failures.

And late last year, there was the resolution of the LIBOR manipulation case. In addition to the $1.5 billion in penalties, a Japanese subsidiary of UBS pleaded guilty to a charge of felony wire fraud in U.S. federal court. (By having a foreign subsidiary take the fall, UBS shielded its U.S. operations.) The repercussions of the LIBOR case did not disappear. During a subsequent hearing on the matter in the British Parliament, several former UBS executives were accused of “gross negligence and incompetence.” So much for the dream of financial glory.

Note: This piece draws from my new Corporate Rap Sheet on UBS, which can be found here.

The Goldman Sachs Rogue Money Machine Keeps Humming

While Congress and the Obama Administration were busy with their fiscal cliff negotiations on New Year’s Eve, Goldman Sachs quietly submitted a batch of filings to the SEC about its own tax initiative. The rogue investment banking firm said it would accelerate the payment of $65 million in stock awards to ten executives, including CEO Lloyd Blankfein, so that they would be subject to 2012 tax rates rather than the expected higher 2013 levels.

Goldman is not the only firm to use the calendar as a form of tax avoidance. Wal-Mart did the same for its shareholders by speeding up the payment of dividends—a boon worth an estimated $180 million for the controlling Walton Family.

Yet there is something particularly galling about this behavior on the part of Goldman, which played such a large role in the financial crisis that, much more than the federal deficit and debt on which Washington is fixated, brought about our current economic problems. Despite facing various federal prosecutions and investor lawsuits, Goldman continues to reward its top people lavishly while begrudging a bit of extra money to Uncle Sam. That is the same the federal government which provided $10 billion in bailout aid and virtually interest-free borrowing to help Goldman get through the crisis (and declined to bring criminal charges against it).

I came across the news about the timing of Goldman’s stock awards just as I was finishing my first Corporate Rap Sheet of the new year, which is about none other than Goldman. I thought I would use this week’s Dirt Diggers to summarize the sordid track record of the firm.

Goldman Sachs, once lionized as the premier “money machine” of Wall Street has in the past few years become synonymous with greed and duplicity. A firm that long prided itself on putting the interests of its clients first was revealed to have repeatedly sold securities that it fully expected to plunge in value. Rolling Stone reporter Matt Taibbi’s depiction of Goldman as “a giant vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” and Greg Smith’s reference to Goldman as “toxic and destructive” in a New York Times op-ed announcing his departure from the firm are two of the most frequently quoted phrases about the financial crisis.

Goldman’s reputation was beginning to unravel even before the financial crisis:

In 2003 it paid $110 million as its share of a global settlement by ten firms with federal, state and industry regulators concerning alleged conflicts of interest between their research and investment banking activities.

In 2005 the SEC announced that Goldman would pay a civil penalty of $40 million to resolve allegations that it violated rules relating to the allocation of stock to institutional customers in initial public offerings.

In 2006 Goldman was one of 15 financial services companies that were fined a total of $13 million in connection with SEC charges that they violated rules relating to auction-rate securities. In another case relating to auction-rate securities brought by the New York State Attorney General, Goldman was fined $22.5 million in 2008.

When the crisis erupted in 2008, Goldman gave in to pressure from federal regulators to convert itself into a bank holding company and received a $5 billion capital infusion from Warren Buffett’s Berkshire Hathaway. Goldman also received $10 billion from the federal government’s Troubled Assets Relief Program (TARP). During this period, Goldman profited from subprime mortgages through its ownership of Litton Loan Servicing, which it sold in 2011 in the wake of numerous abuse allegations.

The forced restructuring of Wall Street took place largely under the direction of Treasury Secretary Hank Paulson, who resigned as Goldman’s CEO in 2006 to take the post at the request of President George W. Bush. Although Paulson was required to liquidate his sizeable Goldman holdings before moving to Treasury, his actions during the 2008 crisis were widely criticized as working to the benefit of his former firm. Chief among these was the allegation that he allowed Lehman Brothers to collapse while taking pains to bail out insurance giant A.I.G., which had extensive dealings with Goldman and which used its federal support to pay off its obligations at 100 cents on the dollar. In the case of Goldman, this amounted to $12.9 billion.

Goldman soon became the leading symbol of the excesses that led up to the financial meltdown. The Taibbi quote was the most colorful of many unflattering depictions of the firm. Blankfein initially responded to the criticism by making the far-fetched claim that Goldman was doing “god’s work.” When that did not go over well, he issued an apology for the firm’s mistakes and vowed to spend $500 million to help thousands of small businesses recover from the recession. That did little to rectify the situation.

In April 2010 the SEC accused Goldman of having committed securities fraud when it sold mortgage-related securities to investors without telling them that the investment vehicle, called Abacus, had been designed in consultation with hedge fund manager John Paulson (no relation to Hank Paulson), who chose securities he expected to decline in value and had shorted the portfolio. The Goldman product did indeed fall in value, causing institutional customers to lose more than $1 billion and Paulson to make a bundle. Paulson was not charged, but the SEC did name Fabrice Tourre, the Goldman vice president who helped create and sell the securities.

In July 2010 the SEC announced that Goldman would pay $550 million to settle the Abacus charges. The settlement also required Goldman to “reform its business practices” but did not oblige the firm to admit to wrongdoing. In January 2011 Goldman announced that an internal review of its policies in the wake of the SEC settlement had found that only limited changes were necessary. Others apparently saw matters differently:

In November 2010 FINRA fined Goldman $650,000 for failing to disclose that two of its registered representatives, including Fabrice Tourre, had been notified by the SEC that they were under investigation.

In March 2011 the SEC announced that it was bringing insider trading charges against former Goldman director Rajat Gupta. He was accused of providing illegal tips, including one about Warren Buffet’s $5 billion investment in Goldman in 2008, to hedge fund manager Raj Rajaratnam. (Gupta was later convicted and sentenced to two years in prison.)

In April 2012 the SEC and FINRA fined Goldman $22 million for failing to prevent its employees from passing illegal stock tips to major customers.

In July 2012 a federal appeals court rejected an effort by Goldman to overturn a $20.5 million arbitrator’s award to investors in the failed hedge fund Bayou Group who had accused Goldman of helping to perpetuate a Ponzi scheme.

That same month, Goldman agreed to pay $26.6 million to settle a suit brought by the Public Employee’s Retirement System of Mississippi accusing it of defrauding investors in a 2006 offering of mortgage-backed securities.

Some good news for Goldman came in August 2012, when the Justice Department decided it would not proceed with a criminal investigation of the firm’s actions during the financial crisis and the SEC dropped an investigation of the firm’s role in a $1.3 billion subprime mortgage deal. All in all, Goldman has emerged largely unscathed from these controversies. Its reputation may be in tatters, but its rogue money machine keeps humming.

The full Corporate Rap Sheet for Goldman can be found here.

The 2012 Corporate Rap Sheet

Corporate crime has been with us for a long time, but 2012 may be remembered as the year in which billion-dollar fines and settlements related to those offenses started to become commonplace. Over the past 12 months, more than half a dozen companies have had to accede to ten-figure penalties (along with plenty of nine-figure cases) to resolve allegations ranging from money laundering and interest-rate manipulation to environmental crimes and illegal marketing of prescription drugs.

The still-unresolved question is whether even these heftier penalties are punitive enough, given that corporate misconduct shows no sign of abating. To help in the consideration of that issue, here is an overview of the year’s corporate misconduct.

BRIBERY. The most notorious corporate bribery scandal of the year involves Wal-Mart, which apart from its unabashed union-busting has tried to cultivate a squeaky clean image. A major investigation by the New York Times in April showed that top executives at the giant retailer thwarted and ultimately shelved an internal probe of extensive bribes paid by lower-level company officials as part of an effort to increase Wal-Mart’s market share in Mexico. A recent follow-up report by the Times provides amazing new details.

Wal-Mart is not alone in its behavior. This year, drug giant Pfizer had to pay $60 million to resolve federal charges related to bribing of doctors, hospital administrators and government regulators in Europe and Asia. Tyco International paid $27 million to resolve bribery charges against several of its subsidiaries. Avon Products is reported to be in discussions with the U.S. Justice Department and the Securities and Exchange Commission to resolve a bribery probe.

MONEY LAUNDERING AND ECONOMIC SANCTIONS. In June the U.S. Justice Department announced that Dutch bank ING would pay $619 million to resolve allegations that it had violated U.S. economic sanctions against countries such as Iran and Cuba. The following month, a U.S. Senate report charged that banking giant HSBC had for years looked the other way as its far-flung operations were being used for money laundering by drug traffickers and potential terrorist financiers. In August, the British bank Standard Chartered agreed to pay $340 million to settle New York State charges that it laundered hundreds of billions of dollars in tainted money for Iran and lied to regulators about its actions; this month it agreed to pay another $327 million to settle related federal charges. Recently, HSBC reached a $1.9 billion money-laundering settlement with federal authorities.

INTEREST-RATE MANIPULATION. This was the year in which it became clear that giant banks have routinely manipulated the key LIBOR interest rate index to their advantage. In June, Barclays agreed to pay about $450 million to settle charges brought over this issue by U.S. and UK regulators. UBS just agreed to pay $1.5 billion to U.S., UK and Swiss authorities and have one of its subsidiaries plead guilty to a criminal fraud charge in connection with LIBOR manipulation.

DISCRIMINATORY LENDING. In July, it was announced that Wells Fargo would pay $175 million to settle allegations that the bank discriminated against black and Latino borrowers in making home mortgage loans.

DECEIVING INVESTORS. In August, Citigroup agreed to pay $590 million to settle a class-action lawsuit alleging that it failed to disclose its full exposure to toxic subprime mortgage debt in the run-up to the 2008 financial crisis. The following month, Bank of America said it would pay $2.4 billion to settle an investor class-action suit charging that it made false and misleading statements during its acquisition of Merrill Lynch during the crisis. In November, JPMorgan Chase and Credit Suisse agreed to pay a total of $417 million to settle SEC charges of deception in the sale of mortgage securities to investors.

DEBT-COLLECTION ABUSES. In October, American Express agreed to pay $112 million to settle charges of abusive debt-collection practices, improper late fees and deceptive marketing of its credit cards.

DEFRAUDING GOVERNMENT. In March, the Justice Department announced that Lockheed Martin would pay $15.9 million to settle allegations that it overcharged the federal government for tools used in military aircraft programs. In October, Bank of America was charged by federal prosecutors with defrauding government-backed mortgage agencies by cranking out faulty loans in the period leading to the financial crisis.

PRICE-FIXING. European antitrust regulators recently imposed the equivalent of nearly $2 billion in fines on electronics companies such as Panasonic, LG, Samsung and Philips for conspiring to fix the prices of television and computer displays. Earlier in the year, the Taiwanese company AU Optronics was fined $500 million by a U.S. court for similar behavior.

ENVIRONMENTAL CRIMES. This year saw a legal milestone in the prosecution of BP for its role in the 2010 Deepwater Horizon drilling accident that killed 11 workers and spilled a vast quantity of crude oil into the Gulf of Mexico. The company pleaded guilty to 14 criminal charges and was hit with $4.5 billion in criminal fines and other penalties. BP was also temporarily barred from getting new federal contracts.

ILLEGAL MARKETING. In July the U.S. Justice Department announced that British pharmaceutical giant GlaxoSmithKline would pay a total of $3 billion to settle criminal and civil charges such as the allegation that it illegally marketed its antidepressants Paxil and Wellbutrin for unapproved and possibly unsafe purposes. The marketing included kickbacks to doctors and other health professionals. The settlement also covered charges relating to the failure to report safety data and overcharging federal healthcare programs. In May, Abbott Laboratories agreed to pay $1.6 billion to settle illegal marketing charges.

COVERING UP SAFETY PROBLEMS. In April, Johnson & Johnson was ordered by a federal judge to pay $1.2 billion after a jury found that the company had concealed safety problems associated with its anti-psychotic drug Risperdal. Toyota was recently fined $17 million by the U.S. Transportation Department for failing to notify regulators about a spate of cases in which floor mats in Lexus SUVs were sliding out of position and interfering with gas pedals.

EXAGGERATING FUEL EFFICIENCY. In November, the U.S. Environmental Protection Agency announced that Hyundai and Kia had overstated the fuel economy ratings of many of the vehicles they had sold over the past two years.

UNSANITARY PRODUCTION. An outbreak of meningitis earlier this year was tied to tainted steroid syringes produced by specialty pharmacies New England Compounding Center and Ameridose that had a history of operating in an unsanitary manner.

FATAL WORKFORCE ACCIDENTS. The Bangladeshi garment factory where a November fire killed more than 100 workers (who had been locked in by their bosses) turned out to be a supplier for Western companies such as Wal-Mart, which is notorious for squeezing contractors to such an extent that they have no choice but to make impossible demands on their employees and force them to work under dangerous conditions.

UNFAIR LABOR PRACTICES. Wal-Mart also creates harsh conditions for its domestic workforce. When a new campaign called OUR Walmart announced plans for peaceful job actions on the big shopping day after Thanksgiving, the company ignored the issues they were raising and tried to get the National Labor Relations Board to block the protests. Other companies that employed anti-union tactics such as lockouts and excessive concessionary demands during the year included Lockheed Martin and Caterpillar.

TAX DODGING. While it is often not technically criminal, tax dodging by large companies frequently bends the law almost beyond recognition. For example, in April an exposé in the New York Times showed how Apple avoids billions of dollars in tax liabilities through elaborate accounting gimmicks such as the “Double Irish with a Dutch Sandwich,” which involves artificially routing profits through various tax haven countries.

FORCED LABOR. In November, global retailer IKEA was revealed to have made use of prison labor in East Germany in the 1980s.

Note: For fuller dossiers on a number of the companies listed here, see my Corporate Rap Sheets. The latest additions to the rap sheet inventory are drug giants AstraZeneca and Eli Lilly.

The Corporate Entitlement Problem

To the extent that the United States has a real fiscal crisis, it has been exacerbated by aggressive tax avoidance on the part of big business. Now the chief executives of many of those same giant corporations are inserting themselves at the center of the current fiscal cliff debate, claiming they know what is best for the country.

The Campaign to Fix the Debt, whose “CEO Fiscal Leadership Council” now has more than 100 members from the corporate elite, is not, of course, proposing that the Fortune 500 start paying its fair share of federal taxes. In fact, the group is pursuing an agenda that may very well result in their companies’ paying even less to Uncle Sam.

As the Institute for Policy Studies has pointed out, companies represented in Fix the Debt stand to save tens of billions of dollars from the territorial tax system the campaign seems to be promoting. IPS has also shown the hypocrisy in the fact that the Fix the Debt CEOs calling for “reforms” in Social Security have fat personal retirement assets from their companies, while many of those firms are underfunding their employee pension plans.

There are numerous other ways in which the companies represented in Fix the Debt are far from honest brokers in dealing with the fiscal cliff—and in actuality engage in practices that exacerbate the country’s fiscal and economic problems.

Take the fact that among those companies are some of the most anti-union employers in the United States, beginning with Honeywell, whose CEO David Cote is on the steering committee of Fix the Debt and is one of its main spokespeople. After members of the Steelworkers union at a uranium facility in Illinois balked at company demands for the elimination of retiree health benefits, reductions in pension benefits and other severe contract concessions, Honeywell locked them out for 12 months.

Also on the council is Lowell McAdam of Verizon Communications, which for years has fought against union organizing at its Verizon Wireless unit and took a hard line in its most recent round of contract negotiations covering its unionized workforce.

Then there is Douglas Oberhelman, the CEO of Caterpillar, which has one of the most contentious labor relations histories of any large company, including a 15-week strike at one plant earlier this year prompted by management demands for far-reaching contract concessions.

Not to mention W. James McNerney, Jr. of Boeing, which was accused of opening an assembly plant in right-to-work South Carolina as a form of retaliation against union activism at its traditional manufacturing center in the Seattle area.

These anti-union crusaders have helped bring about a climate of wage stagnation that not only undermines the living standards of their employees but also weakens businesses that depend on their purchasing power.

Fix the Debt CEOs also seem to think that their companies deserve to be lavishly rewarded when they make investments that create jobs. While it is difficult to discern these rewards at the federal level, where they come through the fine print of the Internal Revenue Code, the payoffs are abundantly clear in the lucrative subsidy deals the corporations receive from state and local governments.

For example, that Boeing plant did not only get the promise of a workforce that in all likelihood will remain unorganized. South Carolina also bestowed on the company a state and local subsidy package that has been valued at more than $900 million.

Verizon has received more than $180 million in subsidies from state and local governments around the country. Caterpillar got an $8.5 million grant from Gov. Rock Perry’s Texas Enterprise Fund as well as local subsidies when it eliminated jobs in Illinois and opened a new plant in the Lone Star State. Honeywell has received subsidies in at least 14 states.

The subsidy recipients represented in Fix the Debt are not limited to that anti-union group; there are many others. For example, Goldman Sachs, whose CEO Lloyd Blankfein has been a frequent spokesperson for the campaign, took advantage of $1.65 billion in low-cost Liberty Bonds when building its new headquarters in Lower Manhattan.

The refusal of these companies to deal respectfully with unionized workers and their insistence on taking lavish taxpayer subsidies they don’t need are two symptoms of a flawed business culture. The United States does have an entitlement problem, but it is not related to Social Security, Medicare or Medicaid. It is the notion held by too many large corporations and their CEOs that their narrow interests are synonymous with the national interest. Rather than presuming to fix the debt, big business needs to fix itself.

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New in CORPORATE RAP SHEETS: a dossier on drug giant GlaxoSmithKline, including its $3 billion fraud settlement with the federal government.

Pfizer’s Long Corporate Rap Sheet

The Dirt Diggers Digest is taking a break from commentary for the Thanksgiving holiday, but the Corporate Rap Sheets project marches on. I’ve just posted a dossier on drug giant Pfizer. Here is its introduction:

Pfizer made itself the largest pharmaceutical company in the world in large part by purchasing its competitors. In the last dozen years it has carried out three mega-acquisitions: Warner-Lambert in 2000, Pharmacia in 2003, and Wyeth in 2009.

Pfizer has also grown through aggressive marketing—a practice it pioneered back in the 1950s by purchasing unprecedented advertising spreads in medical journals. In 2009 the company had to pay a record $2.3 billion to settle federal charges that one of its subsidiaries had illegally marketed a painkiller called Bextra. Along with the questionable marketing, Pfizer has for decades been at the center of controversies over its pricing, including a price-fixing case that began in 1958.

In the area of product safety, Pfizer’s biggest scandal involved defective heart valves sold by its Shiley subsidiary that led to the deaths of more than 100 people. During the investigation of the matter, information came to light suggesting that the company had deliberately misled regulators about the hazards. Pfizer also inherited safety and other legal controversies through its big acquisitions, including a class action suit over Warner-Lambert’s Rezulin diabetes medication, a big settlement over PCB dumping by Pharmacia, and thousands of lawsuits brought by users of Wyeth’s diet drugs.

Also on Pfizer’s list of scandals are a 2012 bribery settlement; massive tax avoidance; and lawsuits alleging that during a meningitis epidemic in Nigeria in the 1990s the company tested a risky new drug on children without consent from their parents.

READ THE ENTIRE PFIZER RAP SHEET HERE.

Wal-Mart’s Other Sins

The job actions taking place at many Wal-Mart locations around the United States have brought new attention to the abysmal labor practices of the country’s largest private employer. More than any other company, Wal-Mart depends on low wages, meager benefits, overtime abuses and gender discrimination to keep its labor costs artificially low while quashing any efforts by workers to rectify those conditions.

Two weeks ago, I used this blog to recount Wal-Mart’s labor and employment track record. Here I want to remind readers of some of the company’s many sins outside the workplace, using information I assembled for the new 5,000-word Wal-Mart entry in my Corporate Rap Sheets series.

Corruption. Wal-Mart doesn’t seem to mind its hardline reputation on personnel matters, but it has tried to otherwise paint itself as a squeaky-clean operation. That image was shattered last spring, when the New York Times published an 8,000-word front-page exposé about moves by top management to thwart and ultimately shelve an investigation of Foreign Corrupt Practices Act violations, focusing on extensive bribes paid by lower-level company officials as part of an effort to increase Wal-Mart’s market share in Mexico.

That story made a huge splash and reportedly undermined the company’s urban expansion efforts. A major public pension fund, the California State Teachers’ Retirement System, sued the company for breach of fiduciary duty in connection with the bribery scandal. It and other institutional investors showed their discontent with top management by opposing the official slate of directors at Wal-Mart’s annual meeting. About 12 percent of the shares outstanding were voted against the slate, an unprecedented level of dissent by the company’s previously quiescent shareholders. The company, apparently still trying to deal with the fallout, has just announced an overhaul of its compliance department.

State income tax avoidance. In 2007 the Wall Street Journal published a front-page story revealing that Wal-Mart was using a real estate gimmick to avoid paying many millions of dollars in state corporate income taxes each year. It was doing this by putting many of its stores under the ownership of a real estate investment trust (REIT) controlled by the company. The stores would pay rent to the captive REIT and deduct those payments as a business expense.

This trick, essentially paying rent to itself, reduced the company’s taxable income and thus lowered its state tax bill (the REIT was structured so its income wasn’t taxed by any state). A report by Citizens for Tax Justice estimated that Wal-Mart had thereby avoided some $2.3 billion in state income tax payments between 1999 and 2005–an average of more than $300 million a year.

Local property tax avoidance. A 2007 report by my colleagues and me at Good Jobs First found that Wal-Mart has sought to reduce its property tax payments by frequently and aggressively challenging the assessed value attached to its U.S. stores and distribution centers by local officials. The report examined a 10 percent random sample of the stores and found that such challenges had been filed for about one-third of them; an examination of all of the distribution centers found challenges at 40 percent, even though many of the latter had been granted property tax abatements when they were built.

Sales tax “skimming.” In a 2008 report by Good Jobs First entitled Skimming the Sales Tax, we found that Wal-Mart was receiving an estimated $60 million a year as a result of the little-known practice in some states of compensating retailers for collecting sales taxes and calculating the amount of that compensation based on total sales. This, in addition to the estimated $130 million in sales-tax-based economic development subsidies, means that Wal-Mart is depriving hard-pressed state and local governments of at least $73 million each year. This is just a small part of the more than $1.2 billion in state and local subsidies that Good Jobs First has documented on our website Wal-Mart Subsidy Watch.

Environmental violations. Wal-Mart has tried very hard in recent years to depict itself as a pioneer of sustainability by wide-ranging initiatives with regard to energy efficiency and the addition of organic foods and other green products to its shelves. Wal-Mart is largely silent about the environmental impact of the millions of customers who in most cases must still drive to the company’s retail outlets. It also wants us to forget that the company itself has had its share of environmental violations. For example, in 2004 the U.S. Department of Justice and the Environmental Protection Agency announced that Wal-Mart would pay a $3.1 million civil penalty and take remedial action to resolve alleged violations of the Clean Water Act in connection with storm water runoff from two dozen company construction sites in nine states. The following year, the company agreed to pay $1.15 million to the state of Connecticut to settle a suit alleging that it had allowed rain water to carry fertilizer, pesticides and other harmful substances stored outside its retail outlets into rivers and streams. It also signed a consent decree with the EPA to resolve charges relating to diesel truck idling at its facilities.

Undocumented Workers. When talking about Wal-Mart it is difficult to avoid the workplace entirely. Aside from its mistreatment of its own employees, the company takes advantage of exploited contract workers. For example, in 2003 a federal racketeering suit was filed against Wal-Mart by lawyers seeking to represent thousands of janitors who cleaned company stores and were reported to be working seven days a week and not receiving overtime pay. The filing took place 18 days after federal agents raided 60 Wal-Mart stores in 21 states to round up about 250 janitors described as undocumented aliens. In 2005 Wal-Mart agreed to pay $11 million to settle federal immigration charges. Documents later emerged suggesting that Wal-Mart executives knew that the company’s cleaning contractors were using undocumented immigrants.

“Dead Peasant” Insurance. Wal-Mart has not only worked people to death but also continued exploiting them after their demise. The mega-retailer is one of the large companies that engaged in the repugnant practice of secretly taking out life insurance on low-paid employees and making itself the beneficiary. The polite term for this is corporate-owned life insurance, though critics have labeled it “janitor’s insurance” or “dead peasant insurance.” In 2004 Wal-Mart settled one case brought in Houston for an undisclosed amount. Two years later it agreed to pay $5.1 million for a class action brought by the estates of former employees in Oklahoma, and in 2011 the company agreed to pay just over $2 million in a class-action suit filed in Florida.

The list could go on. In fact, it is difficult to find a form of corporate misconduct Wal-Mart has not exhibited. Yet it is probably the labor arena that counts the most in determining whether the company will be reined in. Support your local Wal-Mart “associates” in their efforts to stand up to the bully of Bentonville.

Paying Taxes to the Boss

From Howard Jarvis, father of California’s notorious Proposition 13, to Grover Norquist, the superlobbyist who pressures politicians to sign a Taxpayer Protection Pledge, conservative ideologues have spent the past few decades poisoning the attitude of Americans toward the payment of taxes. Norquist in particular has been blunt about his ultimate goal: radical reduction in the size of government.

That crusade assumes that taxes are actually going to government. Yet it turns out that a growing portion of state tax revenue is being diverted to corporations, in the name of job creation or job retention. Nearly $700 million a year in withholding taxes paid by workers is being turned over to their employers.

This startling fact comes from Paying Taxes to the Boss, a report my colleagues and I at Good Jobs First have just published. We found 22 programs in 16 states under which companies are allowed to retain payroll taxes that they deduct from worker paychecks and would normally pass along to state revenue departments. Companies can keep up to 100 percent of the state withholding for designated workers for periods as long as 25 years. The most expensive program, New Jersey’s Business Employment Incentive Program (BEIP), disbursed $178 million in FY2011.

It should come as no surprise that the biggest windfalls are going to major corporations rather than small businesses. Among the largest recipients we found are: Nissan ($160 million in Mississippi), Sears ($150 million in Illinois), General Electric ($115 million in Ohio), Procter & Gamble ($85 million in Utah), Fidelity ($72 million in North Carolina) and Goldman Sachs ($60 million in New Jersey).

Apart from being unseemly, the whole practice is a threat to the fiscal stability of state governments. Payroll and other personal income taxes (PIT) represent a much bigger pot of money than corporate income taxes, so economic development officials can offer larger giveaways to companies and thus do escalating damage to state budgets.

To make matters worse, many of the PIT-based subsidy deals go to companies that don’t really create any new jobs. States frequently offer fat packages to firms that simply relocate existing jobs from a facility in another state. In fact, the diversion of withholding taxes was first adopted in Kentucky as a way to lure companies from neighboring states; the politician credited with originated the idea called it “the atomic bomb of economic development incentives.” Ohio and Indiana responded with their own withholding tax diversions, setting off a PIT-based subsidy arms race.

In recent years, withholding tax diversions have been used, for example, by South Carolina to get Continental Tire to move its North American headquarters from North Carolina; by Georgia to lure NCR from Ohio; and by Colorado to get Arrow Electronics to move its corporate headquarters from New York. In 2011 Kansas provided a reported $47 million in withholding-tax subsidies to AMC Entertainment to get the movie theater chain to move its headquarters from downtown Kansas City, Missouri about 10 miles across the state line to Leawood, a suburb of Kansas City, Kansas.

Along with this interstate job piracy, PIT awards are being given to firms that use the threat of an interstate move to extract big payments to simply stay put. This use of jobs blackmail has been most pronounced recently in Ohio and Illinois.

In 2011 Ohio forked over a $93 million subsidy package—including PIT-based tax credits worth $75 million—in response to a threat by greeting-card giant American Greetings to move its headquarters out of state. A few weeks later, the administration of Gov. John Kasich responded to a similar threat by security services provider Diebold Inc. with a $56 million package, including $30 million in PIT-based credits.

Meanwhile in Illinois, Sears got $150 million in PIT-based credits along with $125 million in local property breaks to keep its headquarters in the distant Chicago suburb of Hoffman Estates. And Motorola Mobility, now part of Google, was given a $100 million withholding-tax deal to keep its headquarters in the Chicago suburb of Libertyville.

At Good Jobs First we normally frame our critique of subsidy programs in terms of the need for greater accountability. In the case of withholding-tax diversions, we decided that the negative impacts are so serious that the best policy recommendation is to call for their abolition.

I wonder if Grover Norquist would support the idea of getting state politicians to pledge that they will not support any increases in taxes going to employers?

Taxing the Tax-Exempt

Tax Day is approaching, and we will soon hear a rising chorus of criticism of large corporations such as Verizon and General Electric that don’t pay their fair share.

That’s as it should be, but there is another group of big entities that also dodge taxes but receive a lot less scrutiny: major non-profit institutions such as universities and hospitals.

Strictly speaking, giant non-profits are not dodging taxes, since they are largely tax-exempt. But that’s precisely the problem. These rich and powerful institutions increasingly behave like for-profit corporations yet are given privileged status under the tax laws. At a time when governments at all levels are desperate for revenue, that privilege is no longer a given.

The latest battleground over non-profit tax exemption is Providence, Rhode Island, where Mayor Angel Taveras has been trying to get local institutions such as Brown University to do more to help the struggling city. The Ivy League college has been making voluntary payments to the city, but Mayor Taveras wants Brown, which has an endowment of about $2.5 billion, to play a greater role in averting the possibility that Providence could end up in bankruptcy. Brown’s facilities in Providence are reported to be worth more than $1 billion, which would mean $38 million in revenue for the city if they were taxed at the commercial rate. Brown is paying about one-tenth of that amount. The mayor’s effort has won support from students at Brown, who have recently held rallies calling on the university to pay its fair share (photo).

It probably comes as a surprise to many that Brown is paying anything at all to the city. Providence’s arrangement with Brown is part of a limited but growing trend among cash-strapped local governments to persuade big non-profits to make voluntary payments in lieu of property taxes, or PILOTs. These are cousins of the PILOT agreements that for-profit companies often negotiate with localities when they are receiving large property tax breaks but want to be sure (often for public relations purposes) they are contributing something to vital local services such as schools and fire departments.

A 2010 report by the Lincoln Institute of Land Policy found that localities in at least 18 states have negotiated PILOT deals with non-profits. This often occurs quietly, but Providence is not the only city that has gotten into a high-profile tug-of-war with large tax-exempt institutions. Perhaps the most contentious case is Boston, home to numerous universities and hospitals with deep pockets.

Boston, where more than 50 percent of the land is tax-exempt, has made limited use of voluntary PILOTs for several decades. Although the city’s program was said to be the largest in the country, it was generating modest amounts of revenue. In FY2008 the total was about $30 million, but half of that came from the Massachusetts Port Authority, which runs Logan Airport and the Port of Boston; the rest came from about two dozen healthcare and educational institutions.

In 2009 Boston Mayor Thomas Menino decided to shake things up by forming a PILOT Task Force. The group issued a report in December 2010 recommending that the city seek to enlist all non-profits owning property worth at least $15 million into the PILOT system with payments equal to 25 percent of what their tax bills would be if they had no exemption. The city eagerly agreed, and last year it began sending letters to several dozen major non-profits asking them to pay up.

Boston inspired other Massachusetts cities such as Worcester, home of Clark University, to join the PILOT bandwagon. (Cambridge did not need inspiration; it has been collecting voluntary payments from Harvard, whose assets now exceed $40 billion, since 1929).

The Boston approach has also generated a lot of criticism from those who argue that sending out letters pressuring non-profits for specific sums is not exactly voluntary and may be tantamount to putting those institutions back on the tax rolls, albeit at a discounted rate.

As much as non-profits may grumble about PILOTs, these payments are quite benign compared to the fate that has befallen some hospitals: the complete loss of their tax-exempt status. For years, healthcare activists have charged that many non-profit hospitals were not functioning as true charitable institutions and should thus not enjoy the privilege of tax exemption.

In 2004 officials in Illinois sent shock waves across the hospital industry by revoking the tax-exempt status of Provena Covenant Medical Center in Urbana. Six years later the state supreme court upheld that determination. In the intervening period, some other Illinois hospitals lost their exempt status and the question of whether non-profit hospitals were doing enough to deserve tax exemption became an issue at the federal level, thanks to relentless efforts by Iowa Sen. Chuck Grassley.

The issue flared up again recently in the wake of a front-page New York Times article reporting that major New York non-profit hospitals have been providing little in the way of charity care, even though on top of their tax exemption they are allowed to tack a 9 percent surcharge on their bills to pay for such care.

Whether as the result of PILOTs or loss of exempt status, increasing numbers of large non-profits will probably find themselves paying more of the cost of government. This is good news for revenue-starved public officials, but how long will it be before these non-profits decide to follow the lead of their counterparts in the for-profit world and begin seeking subsidies to offset those obligations?

The Price of a U.S. Manufacturing Revival

A few decades ago, U.S. factory jobs began moving offshore to countries that lured corporations with the prospect of weak or non-existent unions, minimal regulation, lavish tax breaks and other profit-fattening benefits. Workers in those runaway shops enjoyed little in the way of a social safety net, thus making them all the more dependent on whatever dismal employment opportunities foreign firms had to offer. Much of the U.S. manufacturing sector was left for dead.

Now, we are told, U.S. manufacturing is undergoing a resurrection. “Manufacturing is coming back,” President Obama told a group of blue-collar workers at a recent public event. “Companies are bringing jobs back.” Obama earlier used the State of the Union address to tout the recovery of the U.S. auto industry in the wake of the bailout he championed. One of the bailed-out firms, Chrysler, aired a Super Bowl commercial called “It’s Halftime in America” in which Clint Eastwood hailed the country’s industrial recovery.

It’s true that manufacturing employment has been on the rise after many years on the decline. But is this something calling for unqualified celebration?

Boosters of the industrial resurgence would have us believe it is a reflection of improved U.S. productivity, entrepreneurial zeal or, as Obama put it in the State of the Union, “American ingenuity.” In the case of Chrysler, that should be Italian ingenuity, given that the bailout put the company under the control of Fiat.

But it can just as easily be argued that domestic manufacturing is advancing because the United States has taken on more of the characteristics of the countries that hosted those runaway shops. Deunionization, deregulation, corporate tax preferences, excessive business subsidies and a shriveled safety net are more pronounced than ever before in the U.S. economy. If any of the Republican Presidential candidates get in office, those trends will only accelerate.

Even the Obama Administration is on the bandwagon to a certain extent. Its Office of Information and Regulatory Affairs has obstructed a slew of new environmental and workplace safety regulations. Now the President has legitimized years of conservative rhetoric claiming that companies are overtaxed by introducing a corporate tax reform plan that would reduce statutory rates in general and create an even lower rate for manufacturers. The plan has some good intentions—such as ending special giveaways to Big Oil and other loopholes while encouraging corporations to bring jobs back home—but it ignores years of evidence from groups such as Citizens for Tax Justice showing that big business will exploit any softening of the tax code to bring its actual payments down to the absolute lowest levels.

The perils of joining the manufacturing revival chorus can be seen by looking at heavy equipment producer Caterpillar. The company has been getting a lot of attention lately for expanding its domestic employment through moves such as the planned construction of a $200 million plant in Athens, Georgia that is projected to employ about 1,400.

This needs to be put in some context. According to data in Cat’s 10-K filings, the company’s workforce outside the United States soared from around 13,000 in the early 1990s to more than 71,000 last year, growing to some 57 percent of the firm’s total employment. The number of foreign workers in 2011 was greater than the company’s total head count in 2003.

Cat’s love affair with places such as China blossomed as the company was trying to escape its U.S. unions, which it had unsuccessfully tried to destroy. Cat’s hard-line approach to collective bargaining soured relations with its workers, resulting in a series of strikes and other confrontations, including a dispute in the 1990s that lasted for more than six years.

It appears that unions have no role in Cat’s limited back-to-the-USA plan. The company’s new domestic facilities tend to be located in “right to work” states. After recently trying to impose huge pay cuts at a factory in Ontario (photo), Cat first locked out the workers, then shut down the plant and is now reported to be shifting the work to a facility in Muncie, Indiana, the latest state to adopt a “right-to-work” law to hamstring unions.

By locating the Athens plant in a labor-unfriendly state such as Georgia, Cat is expected to be able to pay wages far below those in its unionized plants. It is also worth noting that Cat agreed to build the plant in Georgia only after it received $75 million in tax breaks and other financial assistance, one of the largest subsidy packages the state has ever offered.

The message of all this seems to be that the U.S. can enjoy a renewal of manufacturing if we are only willing to put up with a few minor inconveniences such as union-busting and big tax giveaways to corporations. That’s apparently what is really meant by American ingenuity.

The Corporate Raid on State Tax Revenue

One of the usual canards of the corporate tax reduction crowd is that high U.S. rates force large companies to invest offshore instead of at home. The Institute on Taxation and Economic Policy and Citizens for Tax Justice have just issued the second installment of their detailed refutation of the myth of oppressive rates.

After putting out a report last month showing that many large corporations end up paying far less than the statutory federal rate (so much less that their rates often become negative), ITEP and CTJ now demonstrate that the story is the same at the state level. Their study, Corporate Tax Dodging in the Fifty States, lists 68 Fortune 500 companies that managed to pay no state income tax at all in at least one year during the period from 2008 through 2010 despite posting a total of nearly $117 billion in pre-tax U.S. profits during those no-tax years.

Sixteen of the companies—including the likes of DuPont, Tenet Healthcare, International Paper, Intel and Peabody Energy—had more than one no-tax year. DuPont, Pepco Holdings and American Electric Power contributed nothing to state coffers in all three years. The report points out that, if the 265 companies in the sample had all paid the average 6.2 percent average corporate tax rate on their combined $1.33 trillion in U.S. profits, their state tax bill would have been about $82 billion. Instead, they paid only $40 billion, meaning that states were left without $42 billion in revenue that could have been used to help pay for education, healthcare, transportation, public safety and other key state government functions.

A system that allows many companies to sidestep millions of dollars in state tax payments can hardly be called onerous and certainly can’t be the reason for investing overseas. It is thus no surprise that the ITEP/CTJ list of firms with negative or minimal tax rates includes corporations that engage in extensive offshoring; among them are Eli Lilly, General Electric, Hewlett Packard and Merck.

At the same time, the key state tax dodgers include some manufacturing companies that have (at least in part) bucked the offshoring trend and made substantial investments in the United States. Chief among them are Intel and Boeing.

Intel, which has been spending billions on semiconductor fabrication plants in state such as Arizona, and Boeing, which focuses its aircraft assembly in Washington State and South Carolina, are major recipients of the kind of company-specific tax breaks that the ITEP/CTJ report cites as one of the reasons for the decline of state corporate income tax collections.

Intel has been playing the subsidy game in earnest since 1993, when it announced plans for what was then an unprecedented $1 billion investment in a new chip plant, to be built in a suburb of Albuquerque called Rio Rancho. The company pressured local officials to provide what would ultimately amount to about $455 million in property tax abatements and sales tax exemptions on the equipment purchased for the facility.

Soon after getting its way in New Mexico, Intel put the squeeze on officials in Arizona, where it proposed to build another plant in Chandler, a suburb of Phoenix. The company received some $82 million in property tax abatements, sales tax exemptions and corporate income tax credits. In 2005 Intel strong-armed the state to change the method by which it calculates corporate taxes to a system known as single sales factor, which allowed Intel and other companies with lots of property and a big payroll but relatively low sales in the state to enjoy enormous tax reductions.

In 1999 Intel announced plans for a large expansion of its semiconductor operations in Oregon but made it clear that the investment was contingent on receiving a property tax abatement that turned out to be worth an estimated $200 million over 15 years. In 2005 Intel got the county to extend the property tax break to 2025, locking in an estimated $579 million in additional savings. Intel also enjoys a substantial reduction in corporate income taxes thanks to Oregon’s decision to join the single sales factor bandwagon.

Boeing has also sought special tax breaks and other subsidies in multiple states. When the company was ready to begin production of its much-anticipated Dreamliner, it forced Washington to compete with around 20 other states for the work and agreed to stay there only after the legislature in 2003 approved a package of research & development tax credits and cuts in Business & Occupation taxes (the state’s substitute for a corporate income tax), sales taxes and property taxes that together were estimated to be worth $3.2 billion over 20 years.

Rather than showing its appreciation to Washington, the company went shopping for a better deal for the second Dreamliner production line. It chose South Carolina, where it was awarded a subsidy package that has been valued at more than $900 million and is able to take advantage of a “right to work” law that discourages unionization. The Machinists union accused the company of retaliating against union activism in Washington, but the complaint has just been withdrawn as part of a deal in which Boeing will build its new 737 in the Seattle area.

While it was once taken for granted that large U.S. corporations would do most of their investing at home, companies such as Boeing and Intel now act as if they are doing the country a favor with their domestic projects and expect to be rewarded handsomely in the form of special state tax breaks on top of those business-friendly provisions available to all firms.

Far from being held back by tax rates, large U.S. corporations invest offshore or onshore as they please while contributing as little as possible to the cost of public services.