Governor Andrew Cuomo's tax-free zones at state universities are just the latest move to create politically favored businesses and insulate their owners from the rigors of market competition.
Cuomo and others in both parties who back such laws say they spur entrepreneurs. What they are really doing is creating an enlarged body of business owners who depend on the largesse of the voters and, thus, become political dependents.
His new law undermines market economics and promotes corporate socialism, in which profits are privatized and costs are socialized.
Had Cuomo proposed this law in, say, 1979, the year his father Mario became lieutenant governor, it would have been regarded as a major political scandal. By 2008, the enemies of market economics were so triumphant that the George W. Bush administration bailed out Wall Street after willfully blinding itself to massive fraud by mortgage marketers, as did the Obama administration.
Cuomo's plan redistributes wealth upwards, showing that he is no Democrat in the traditional sense that Democrats care about working people. Rather, Cuomo is part of the growing cadre of politicians whose success depends on being vetted by Wall Street and who win acceptance because they work to tax the many to benefit the already rich few.
These political dependents differ from children, the disabled, the sick, and the elderly who collect benefits from the state. The rich dependents make campaign donations and find jobs when needed for politicians' friends and family – legalized kickbacks that are a bargain compared to the welfare they collect.
Nationwide, state and local gifts and subsidies to business cost $70 billion or more annually. That is $900 each year for a family of four.
New York taxpayers are being forced to give $1.4 billion to microchip maker GlobalFoundries, owned by the hereditary ruler of Abu Dhabi, Sheikh Khalifa bin Zayed Al Nahyan. Your cost: $71. Alcoa will collect $5.6 billion in state subsidies over 50 years, costing you $284.
Contrast these giveaways with Cuomo's refusal to investigate cheating by real-estate partnerships that cost the state up to $700 million per year in taxes. The Cuomo administration claims that it chases these cheats, yet not a single document in the public record supports this. Instead, the record reveals audits focusing on cheating by out-of-state investors, meaning people less likely to be Cuomo donors.
The Wall Street Journal opinion pages, Forbes Magazine, and the Heritage Foundation all encourage corporate welfare and policies that insulate the biggest businesses from the rigors of market competition.
Corporate welfare is a failure. Three decades of data show zero factual support for the proposition that taking from the many to give to the rich benefits all.
If corporate welfare worked, we would be drowning in jobs. Instead we have chronic long-term unemployment. The average income of the 90 percent of American taxpayers in 2011 was 13 percent smaller than in 1973. Since 1999, the median wage – half make more, half less – has been stuck at a little north of $500 per week, while the number of jobs has grown at a small fraction of population increases.
Under the Cuomo giveaway law, businesses located on favored parcels of land owned by the state universities (land already exempt from property taxes) will earn tax-free profits. "By tax-free, I mean really, really tax-free," Cuomo said recently.
Workers at these businesses would be exempt from state income taxes. That will put downward pressure on wages as owners try to capture part of the tax savings. They can do this by delaying raises and letting inflation work in the owners' favor.
Business owners who cannot operate from these parcels are disadvantaged because they and their workers will be taxed.
Here is a simple principle to keep in mind:
If an investment is sound, the market will finance it. If it is not sound, why should taxpayers be forced to subsidize it?
If we are going to subsidize businesses, then shouldn't the taxpayers get a return on their investment? How about shares of stock paying dividends until taxpayers are repaid?
A better idea than Cuomo's corporate welfare is a level playing field that makes investment in New York more attractive.
The legislature could repeal the state corporate income tax, which applies mostly to small business. All business taxes raise about 11 percent of state revenue, the basic corporate income tax 4 percent.
The legislature could make up for that 4 percent with less corporate welfare and higher taxes on very rich New Yorkers, who in turn own most of the capital. How about closing loopholes through which very rich New Yorkers put their assets in trusts? How about taxing money borrowed against untaxed gains? Why let managers of hedge and private equity funds defer their fees, paying their taxes by-and-by? And then there are those real estate cheats.
The problem is that there is no lobby for this, no organization of principled business owners who will shower politicians with donations in return for promoting competitive markets.
In 1846 we enacted an absolute ban on gifts of money, or even credit, to corporations.
Article VII, Section 8 of the New York state constitution states that "the money of the state shall not be given or loaned to or in aid of any private corporation or association, or private undertaking; nor shall the credit of the state be given or loaned to or in aid of any individual, or public or private corporation or association, or private undertaking."
In adopting the state constitutions of 1874 and 1938 and rejecting a new one in 1967, we reaffirmed that ban, all by 2-to-1 votes.
The gift to the sheikh – $1 million plus per promised job – was challenged in court by 50 taxpayers, an amalgam that included liberals and libertarians, Republicans and Democrats.
Barbara Underwood, the state solicitor general, argued in court that these were not gifts but monetary tools "to promote the New York economy."
New York's highest court ruled in November 2011 that these gifts were perfectly legal.
So how did Judge Theodore Jones, who wrote the decision, along with Chief Judge Jonathan Lippman and Judges Carmen Beauchamp Ciparick, Victoria A. Graffeo, and Susan Phillips get around the voters saying no, no, no and no?
They ruled that while the state "may not lend its credit to a public corporation," nothing "prohibits the State from adopting appropriations directed to" intermediaries, who can then give the money, or credit, to private corporations.
In other words, what the state cannot do directly it can do by passing the money through an entity it creates. That is not just absurd, it makes a mockery of our state constitution.
In dissent, Judge Eugene Pigott meticulously deconstructed the errors of logic and willful blindness of the majority. He quoted the great jurist Benjamin Cardozo in a case declaring that gifts to World War I veterans violated the no-gifts clause.
Judge Cardozo, who supported gifts to soldiers, wrote that the ban was intended only "to put an end to the use of credit of the state in fostering the growth of private enterprise and business."
Judge Pigott said he was unimpressed by the majority argument that corporate gifts have a long history. "Unconstitutional acts do not become constitutional by virtue of repetition, custom or passage of time," he wrote.
Judge Robert S. Smith heartily endorsed Pigott's dissent. The legislature, he wrote, "is free to disregard both received economic teachings and common sense.... But when our Legislature commits the precise folly that a provision of our Constitution was written to prevent, and this Court responds by judicially repealing the constitutional provision, I think I am entitled to be annoyed."
The GlobalFoundries ruling makes future challenges to corporate gifts virtually impossible. Now before having any opportunity to compel testimony or obtain documents, plaintiffs must prove that a gift is unconstitutional to the standard in criminal cases: beyond reasonable doubt.
Eventually Cuomo, or a successor, will issue a report on the new tax-free plan. Expect ginned-up numbers claiming success.
After all, Thomas DiNapoli, the state comptroller, told us in May that $2.8 billion in state and local tax breaks for businesses from 2007 though 2011 "gained" more than a million jobs at an average cost of about $2,700.
The state lost 88,400 jobs during those years, Bureau of Labor Statistics data show.
Corporate welfare does not work.
David Cay Johnston, winner of the Pulitzer Prize in 2011, is an investigative journalist specializing in economics and tax issues. Mary Anna Towler's Urban Journal returns next week.
"Had Cuomo proposed this law in, say, 1979, the year his father Mario became governor, it would have been regarded as a major political scandal."
"Eventually Cuomo, or a successor, will issue a report on the new tax-free plan. Expect ginned-up numbers claiming success."