August 2014 Archives

Burger King’s Tax Dodge is Just the Latest of Its Restructuring Schemes

mergerking Nothing says America like hamburger chains such as Burger King, yet the fast-food giant is the latest company to put tax dodging above national loyalty.

The home of the Whopper wants to carry out one of the so-called inversions that are all the rage among large U.S. corporations. Burger King is proposing to merge with the much smaller Canadian doughnut and coffee chain Tim Hortons and register the combined company north of the border, where it would be able to take advantage of lower tax rates on its U.S. revenues.

An interesting twist is that a large part of Burger King’s financing for the deal is coming from Warren Buffett, who apart from his investment prowess is known for his statements calling on the wealthy (individuals, at least) to pay more in federal taxes.

While many are criticizing Buffett for hypocrisy, the sage of Omaha seems to be taking refuge behind Burger King’s claim that the deal is not tax-driven but is instead a growth opportunity. That does not pass the laugh test, but it is true that Burger King has been willing to submit to frequent restructuring in its never-ending quest to emerge from the shadow of its much larger rival McDonald’s.

In its 60-year history, Burger King has undergone many changes. In 1967 founders James McLamore and David Edgerton sold the chain to the flour giant Pillsbury, which for two decades struggled to find the right formula for the company. In 1989 Pillsbury was taken over by Britain’s Grand Metropolitan, which continued the ceaseless experimentation. After Grand Met merged with Guinness to form Diageo, Burger King did not fit well with a global company focused on alcoholic beverages.

In 2002 the burger chain was taken over by private equity firms Texas Pacific Group (now TPG Capital) , Bain Capital and Goldman Sachs Capital Partners. After they extracted what they could from the company, the buyout firms arranged for an initial public offering that would allow them to profit even more. Four years after the IPO, the chain was taken over by another private equity firm, 3G Capital of Brazil. After only two years, 3G took a portion of Burger King public again. Now 3G, which partnered with Buffett on the takeover of H.J. Heinz, is at it again with the Tim Hortons deal.

One thing that is clear from this history is that Burger King is not, in fact, a purely American company. But that doesn’t legitimize the Canadian inversion. All it shows is that Burger King’s problems predated the Tim Hortons deal.

The chain has gone through a dizzying series of ownership changes that have probably done little to help its underlying business. And there’s also the issue of how that business is structured. As the Wall Street Journal points out, Burger King is essentially an “assetless company.” It owns less than 1 percent of its nearly 14,000 worldwide outlets, with the rest in the hands of franchisees.

This means that the company is largely removed from the day-to-day operations of its outlets and is instead focused on the royalties it collects from the franchisees. This means that it, even more than other fast-food chains, can claim to be uninvolved in controversial matters such as wage rates and other employment practices.

That posture may no longer be tenable. The recent ruling by the National Labor Relations Board holding McDonald’s jointly liable for labor and wage violations by its franchise operators may very well be applied to other chains.

For decades, Burger King has been treated as a pawn in the financial machinations of global corporations and buyout firms. Now its owners want U.S. taxpayers to help underwrite the latest scheme. Hopefully, they won’t get their way this time.

The Environmental Prosecution Gap

With reports of a $16 billion Justice Department settlement with Bank of America following on the heels of other big payouts by misbehaving banks, it may seem that corporate crime these days is mainly an issue for the financial sector. The big banks have plenty of blemishes on their record, but then again so do other large corporations when it comes to areas such as environmental compliance.

After all, it was only four months ago that Anadarko Petroleum had to pay $5.1 billion to resolve federal charges that had been brought in connection with the clean-up of thousands of toxic waste sites around the country resulting from decades of questionable practices by Kerr-McGee, now a subsidiary of Anadarko. This settlement set a record for an environmental case, surpassing the $4 billion in penalties BP had to pay in 2012 as part of its guilty plea on criminal charges relating to the Deepwater Horizon disaster in the Gulf of Mexico.

Despite high-profile cases such as these, environmental offenses are being prosecuted in a less than vigorous manner. This problem is brought home in a recent analysis by The Crime Report website produced at the Center on Media, Crime and Justice at the John Jay College of Criminal Justice in New York.

In a review of enforcement data in the EPA’s ECHO database, The Crime Report found that the agency has become increasingly disinclined to bring criminal rather than civil charges against violators. In recent years, the report notes, fewer than one-half of one percent of violations trigger criminal investigations, which require the involvement of the Justice Department to proceed in court.

Part of the problem is that criminal cases are much more difficult to pursue. The Crime Report quotes attorney Mark Roberts of the non-profit Environmental Investigation Agency as saying: “I think a criminal prosecution will be defended much harder … If you’re in that tiny percentage that gets charged criminally, you want to win.”

While delivering the bad news about weak prosecution, The Crime Report makes it easier for researchers and activists to access data about environmental violations. It took data from ECHO and created an interactive map that provides summaries by EPA region and by urban area, and also allows zooming in on specific facilities. When an urban area is chosen on the map, a table appears below showing the largest penalties overall, with breakdowns by categories such as Clean Air Act violations and Clean Water Act violations.

This is especially useful for clusters of heavily polluting facilities such as those in what is informally known as Cancer Alley between Baton Rouge and New Orleans. Yet a look at the data for this area shows the limitations not only of the EPA’s criminal prosecutions but its enforcement activity in general. Drilling down shows dozens of facilities that were often found to be in non-compliance yet were hit with little or nothing in the way of penalties during the past five years.

There are some fairly significant fines, such as the $198,000 paid by PCS Nitrogen in Geismar and the $84,000 paid by the Total Petroleum Styrene Monomer Plant in Carville. Yet, for the most part, the data paint a picture that is a far cry from the right’s depiction of the EPA as a tyrannical force preying on defenseless businesses.

Whether it is in banking or petrochemicals, aggressive prosecutions are the only way to get large corporations to clean up their act.

Payday Predators Become the Prey

shark-week-cover2 Every industry has its faults, but there are only a few for which it can be said that society would be better off if they did not exist at all. One member of that special group is payday lending, the business of providing short-term cash advances to desperate people at unconscionably high interest rates with the expectation that they will not be able to repay the money and thereby get caught in an ever-worsening debt trap.

National People’s Action and other groups fighting predatory lending are highlighting this problem with their Shark Week Campaign. An NPA fact sheet does a good job of summarizing what’s wrong with payday lending and links to some of the best research on the subject, including a 2013 report by the Center for Responsible Lending that makes the case for stronger federal regulation. The issue was also the focus of a brilliant segment on John Oliver’s HBO show that included a mock public service ad narrated by Sarah Silverman arguing that the best alternative to payday loans is “anything else.”

While stricter rules are clearly needed, the good news is that the sharks are no longer operating with total impunity. The Dodd-Frank Act opened the door to federal action on payday lending, and the Consumer Financial Protection Bureau is starting to act on that authority. Last November, the agency ordered Cash America International, one of the largest predators, to pay $19 million ($5 million in fines and $14 million in refunds to customers) for using illegal robo-signing in preparing court documents in debt collection lawsuits. The company was also charged with violating special rules involving lending to military families. In addition, Cash America was accused of destroying documents relevant to the agency’s investigation of its practices.

In the wake of that case, the CFPB took its first action against an online payday lender, suing CashCall Inc. for engaging in “unfair, deceptive, and abusive practices, including debiting consumer checking accounts for loans that were void.” In July, the bureau announced that Ace Cash Express would pay $10 million to settle charges that it engaged in “illegal debt collections tactics — including harassment and false threats of lawsuits or criminal prosecution — to pressure overdue borrowers into taking out additional loans they could not afford.”

Last March, the bureau held a field hearing on payday lending and issued a report finding that more than 80 percent of loans by the industry are rolled over or followed by another loan. The Justice Department is reported to be carrying out an investigation of the role of banks in financing payday lenders.

The sharks are also under attack at the state and local level. Manhattan District Attorney Cyrus Vance Jr. just announced the criminal indictment of a group of online payday lenders and the individuals who control them. The case is an effort to get at companies that use complicated corporate structures and offshore registration to get around the interest rate caps that states such as New York have adopted.

In June, officials in Maryland announced that South Dakota-based Western Sky Financial and CashCall would pay about $2 million to settle charges that they engaged in “abusive payday lending and collections activities” that included loans with annual interest rates of more than 1,800 percent. The settlement also permanently barred the companies from doing any business in the state that required licensing.

Last October, five payday lending companies had to pay $300,000 to settle charges brought by the New York State attorney general, and the year before Sure Advance had to hand over $760,000 to settle allegations that it charged illegal rates as high as 1,564 percent.

Payday lenders have also been targeted in class action lawsuits. Cash America agreed to pay up to $36 million to settle one such case that had been brought under Georgia’s usury and racketeering laws.

Faced with a dwindling number of states in which they can operate as they please, along with tighter federal rules, some of the payday companies are giving up. For example, giant Cash America is reportedly planning to spin off its payday lending operations and focus instead on the supposedly more reputable business of pawn shops.

Most stories about attempts to control abusive commercial practices end up with corporations finding a way to prevail. Payday lending may turn out to be that rare case in which the predators lose.

The Second Coming of Henry Ford?

River-Rouge-Plant Elon Musk apparently wants us to think of him as the second coming of Henry Ford. The CEO of electric carmaker Tesla Motors is planning to build a $5 billion, 6,500-worker battery “gigafactory” that is being likened to Ford’s legendary River Rouge complex in Dearborn, Michigan. Musk has a group of western states desperately competing for the project.

It remains to be seen whether the Tesla plant will rise to the level of Ford’s integrated industrial wonder (photo), which in the 1920s was the largest manufacturing site in the world. Yet the two facilities will have something in common: being built in part with taxpayer money. As Robert Lacey tells it in his 1986 book Ford: The Men and the Machine, Ford arranged for the federal government to pay $3.5 million for the deepening of the Rouge River and the draining of marshes at the plant site as part of the contract Ford had been granted to produce Eagle boats for the U.S. Navy.

Tesla has also received help from Uncle Sam — in the form of a $465 million loan it repaid last year — but now the company has its hand out to those states vying to be chosen for the gigafactory. It’s been understood for months that the winner of the competition would have to put serious money on the table, but now Musk has indicated exactly how much in the way of subsidies will be required: 10 percent of the cost of the plant, or about $500 million.

The company and its apologists insist that the demand is not excessive, noting that Volkswagen got a bit more for its assembly plant in Tennessee despite the fact that it is employing a lot fewer workers than Tesla promises. That’s true. Volkswagen got $554 million from state and local agencies, and that is far from the largest subsidy package ever awarded in the United States. In the Good Jobs First Megadeals compilation, it ranks 24th.

Yet such a comparison is problematic, because it is far from clear that the $500 million figure will be the total subsidy burden the winner of the Tesla auction would take on. In all likelihood, the $500 million would be only the up-front cost, while state and local governments would also probably have to offer long-term tax benefits that would end up being much more expensive.

This happens all the time. In the case of Volkswagen, public officials were initially mum about the estimated total size of the package, and it was only through reporting by the Chattanooga Times Free Press that the real costs came to light. By the way, VW is now getting $274 million more for a plant expansion.

Another egregious case of low-balling subsidy estimates happened in Mississippi, where officials initially put the cost of the package given to Nissan in 2000 at $295 million. Yet, as my colleague Kasia Tarczynska and I showed, when all was said and done, state and local agencies in the Magnolia State gave the carmaker subsidies worth more than $1.3 billion.

The odds that Tesla will seek to maximize its subsidy payoff are increased by the fact that it just announced a partnership with Panasonic. The Japanese company managed to extract a subsidy worth more than $100 million from New Jersey to move its North American headquarters a short distance.

Along with underestimated costs, there is a chance that projections about the Tesla project are overstating potential benefits. Particularly suspicious is the claim of 6,500 jobs. Given current manufacturing practices, a workforce of that size is highly unlikely. I can’t help but suspect that the number may include temporary construction jobs or supplier jobs. It’s worth noting that the heavily subsidized advanced battery projects in Michigan mostly created jobs only in the hundreds, the best case being the 1,000 positions created at A123 Systems before it went bankrupt.

And even if Tesla beats those figures, there’s the question of how good the jobs will be. The Japanese and German auto assembly transplants have had to set their wages close to those of the Detroit automakers (though benefits are substantially lower). Will Tesla feel any pressure to create decently paying jobs, or will it take advantage of a struggling area such as Reno, Nevada (one of the possible sites) or the low-wage, anti-union climate of Texas (another contender) to keep compensation levels low?

Fortunately, it is not entirely up to the company. The upside to the insistence on a big subsidy package by Tesla is that states attach some job quality standards to their awards. From this perspective, the best outcome would be for Tesla to choose Nevada, which ranked first in the rankings my colleagues and I at Good Jobs First did on state practices in this area.

Even if Elon Musk does not agree with Henry Ford’s famous wage boosting policy, he won’t be able to exploit his workers as thoroughly as he is doing to taxpayers.