Understanding Corporate Welfare & "Pay to Play" Politics

Estimates on corporate welfare costs in New York varies from $4 billion per year according to the New York Times and $7 billion per year according to the social justice organization Align NY.

The State Constitution Actually Prohibits

Corporate Welfare

Billions of tax dollars are given aiding a select few businesses despite the fact that the New York State Constitution clearly states:

“[t]he money of the state shall not be given or loaned to or in aid of any private corporation or association, or private undertaking;”

To get around this restriction an Amendment to the State Constitution was put up for a vote in 1967. Voters rejected amending the Constitution to allow tax dollars to be distributed to private businesses for economic development purposes. After voters wisely rejected using public tax dollars for private interests, state politicians one year later got creative and formed the New York State Urban Development Corporation in 1968, renamed the Empire State Development Corporation in 1995.

Although the New York State Constitution prohibits using state dollars to assist private businesses, public authorities like Empire State Development and other Industrial Development Agencies are used as vehicles to funnel tax dollars to favored businesses. The argument has been that public authorities are not the State and the Constitution does not prohibit them from dispensing funds to businesses. An absurd stretch in my opinion.

Ostrowski’s Important Lawsuit

In 2011 Buffalo lawyer James Ostrowski made a tremendous effort to end the insanity of politicians providing taxpayer dollars to corporations under the guise of creating jobs. Ostrowski’s lawsuit made it up to the Court of Appeals, the highest Court in New York State, where we all lost in a five to two decision.

The five Judges ruling against Ostrowski’s argument that the New York State Constitution is being violated decided that while it is against the Constitution for government officials to give or loan tax dollars to private corporations; it is not unconstitutional for government officials to provide tax dollars to state created Authority’s and for these agencies in turn to give or loan public dollars to private corporations. There’s that absurd stretch.

The two dissenting Judges led by Eugene Pigott from Western New York made

some great points:

• In 1967, state voters rejected a proposed amendment to the state constitution that would have allowed the distribution of funds to private businesses for the purpose of economic development in the same manner the Empire State Development Corporation is distributing funds now.

• “There seems to me no fundamental difference between the State directly giving monies to such private enterprises and the State creating a public corporation with the express intention of doing so.” “...the majority errs in holding that the Legislature may do indirectly, through a public corporation conduit, what the Constitution forbids it to do directly.” (Justice Pigott).

• “It is an illusion—one that seems to have the persistence of original sin—that prosperity can be attained by taking money from taxpayers and handing it to favored businesses.” (Justice Smith)

• “I seem to remember a time when IBM could make money by selling its products for more than it cost to produce them. I would have thought semiconductor manufacturers could do the same. If they cannot, a bail-out for their shareholders is not a prudent use of more than a billion dollars in taxpayer funds.” (Justice Smith)

I agree completely with their opinions that the State Constitution is being violated. This constitutional violation creates a “pay to play” environment of corruption, which impacts the operation of government in many ways.

Difference between Tax Exemption and a Tax Credit Benefiting A Select Few

Tax credits are just one part of the several billion dollars provided to businesses. The available data for businesses that receive tax credits shows how few businesses actually reap the benefits of public assistance. New York State now provides $1.7 billion in tax credits to businesses.

It is important to understand the difference between a tax exemption or deduction and a tax credit. A tax credit is far more valuable to a business than a tax exemption or deduction. Exemptions and deductions reduce income subject to taxes. In New York State, for example, where the current corporate tax rate is 7.1 percent, the value of a $1,000 exemption or deduction is equal to $71. Credits on the other hand directly reduce taxes on a dollar-for-dollar basis, e.g., a $1,000 tax credit reduces taxes by $1,000.

In many instances a business receiving a tax credit is allowed to receive a cash payment from the State if the credit exceeds their taxes. These cash payments are made even if the business has not paid taxes in the past or will not pay taxes in the future (not uncommon for large corporations). Most credits are also uncapped, meaning there is no limit to the amount that can be received.

The New York State Tax Reform and Fairness Commission created by Governor Cuomo analyzed data from 2009 and concluded that only a small number of businesses and taxpayers were selected to receive tax credits.

• Of the nearly 390,000 corporations filed as S Corporations; fewer than 2,500, or 0.6 percent, claimed business tax credits.

• Of the more than 260,000 corporation franchise tax returns filed; just over 1 percent claimed one or more business tax credits.

• More than 217,000 partnership returns were filed; slightly over 2,600, or 1.2 percent, claimed one or more business tax credits.

• Less than 0.5 percent of over five million S Corporation shareholders and partnership members claimed tax credits.

In 1994, nine business tax credits were available to taxpayers with a cost to the state of about $200 million. By 2013, the number of credits available to taxpayers had jumped to 50, costing the state an estimated $1.7 billion.

Corporate Welfare & Campaign Contributions

Corporate welfare is the mother’s milk that drives the “pay to play” culture in state and local government. How does Byron Brown as Mayor of one of the poorest cities in the nation raise $1.5 million in campaign funds? How does Andrew Cuomo raise an astonishing $47 million for his campaign? When people give money to a political candidate they expect something in return. The return favor for campaign contributions usually are a patronage job, or public assistance for a development project or a business.

Where Cuomo’s campaign money comes from shows you how our current corrupt system of legalized bribery works. According

to an analysis by the New York Public Interest

Research Group:

• More than 80 percent of Cuomo’s money has come from donors who have given aggregate totals of $10,000 or more.

• 242 donors have given Cuomo $40,000 or more.

• Only 0.69 percent of Cuomo’s money has come from individuals who have given aggregate totals of less than $1,000.

Cuomo’s top 10 donors consist primarily of real estate developers who contributed from $121,500 to $800,000. In New York there is supposed to be a limit that a donor can give to a state wide candidate in the amount of $60,800. New York’s limit of $60,800 is the highest in the nation, yet wealthy special interests by exploiting loopholes in campaign finance laws can give obscene amounts of money as the information above shows.

Let’s look at one recent example of a large campaign contribution and the benefit received. Extell Development, a New York City real estate firm funneled $100,000 to Governor Cuomo through affiliates days before Cuomo signed legislation providing tax breaks for an apartment building owned by the company in New York City. Three weeks later Extell’s CEO donated $100,000 to the New York State Democratic Committee, which frequently spends money on Cuomo’s behalf. What did Extell get for their $200,000 campaign contribution? A tax break worth $35 million on their apartment building. Extell’s CEO’s name does not show up on any finance contribution records searched back to 1999. Suddenly he makes a substantial contribution and suddenly he obtains a $35 million dollar tax break. Let’s not forget that Cuomo shut down the Moreland Commission he formed to investigate ethical violations in Albany, when the Commission started looking into Cuomo campaign donors.

Part of the charges filed against Assembly Speaker Sheldon Silver involve directing real estate firms to utilize a law firm that paid kick backs to Silver. The law firm Silver referred business to specialized in obtaining property tax reductions through state programs. One of the clients Silver hooked up with the firm was Leonard Litwin, a wealthy real estate developer who is New York’s largest campaign contributor having made more than $10 million in donations since 2005.

Reform Needed

While Governor Cuomo is demanding that the State Legislature pass ethics reforms or he will refuse to approve the budget, it is interesting to note two major reforms that Cuomo is not pursuing.

Eliminating the Limited Liability Company loophole—Corporations are limited to donating $5,000 per calendar year to political candidates in New York. There are many ways that people can give more. One of the biggest loopholes in the election law is that there is not a limit for campaign contributions from Limited Liability Companies (LLC). Forming an LLC is an easy process that involves filling out a one page form and paying a filing fee of $200. Many real estate developers create a separate LLC for each development that they own.

New York City real estate developer Leonard Litwin contributed $1 million to Cuomo through 26 Limited Liability Companies he controls. Cuomo has raised over $6.2 million from LLC’s, which is more than any other New York elected official. Federal regulations prohibit direct campaign contributions from corporations and LLC’s to a political candidate but in New York the LLC gravy train continues to benefit many politicians.

Public Financing of Elections—To encourage smaller donations, New York City’s public financing program matches each dollar a resident gives, up to $175 per contributor, with $6 in public funds, for a maximum of $1,050 in public funds per contributor. A $100 contribution turns into $700 for the candidate—the initial $100 contribution plus $600 in matching funds. Matching funds can turn small house parties into big-dollar fundraisers. That means candidates can build competitive campaigns with grassroots support even without access to wealthy donors or the support of special interest groups.

We need a new system that encourages people to seek public office to represent average citizens. Public financing of elections is a step in the right direction as far as addressing the “Pay to Play” culture that exists in government today.

Paul Wolf, Esq. is the founder of the non-profit Center for Reinventing Government