There will be more Detroits: Your town could be next

Big corporations like Apple do anything they can to avoid paying taxes. It's driving governments out of business

By Robert Hennelly
Published July 24, 2013 3:06PM (EDT)
               (Reuters/Rebecca Cook)
(Reuters/Rebecca Cook)

President Obama comes to Galesburg, Illinois (population: 32,000) today, where he is expected to once again hit the reset button on his domestic economic agenda for the rest of his second term. His advance folks know the appealing Norman Rockwell-like backdrop of this rural farming community. It is also the birthplace of Carl Sandburg, who as America’s poet understood the power of pride in a particular place.

But these days, in a global economy where U.S. multinationals can stash hundreds of billions of dollars in profits in off-shore tax havens, the smart play to win all the marbles is to really be from no place in particular. There’s nothing to protect other than your data.

Take the sad case of the City of Detroit, whose name is now synonymous with a global brand “Detroit,” as in the auto industry. Detroit, the municipality, filed for bankruptcy. America’s 18th largest city, overwhelmingly African American, just 400 miles northeast of Galesburg, was once a thriving industrial powerhouse of almost two million people. Now it has dwindled down to 700,000 residents who live in one of the nation’s most violent cities, where it can take an hour for a 911 response.

In a parallel universe, there is another gleaming “Detroit” that’s thriving. It is made up of Ford, General Motors and Chrysler, three multinational car-making behemoths. That’s the one that President Obama bailed out and “refused to let go bankrupt.”

But bail out the actual Detroit where people live? Not so much. It turns out after bailing out Wall Street, the banks and the car companies, Washington has bailout fatigue. Detroit’s a poor city and it takes deep pockets to get action in the beltway and Republican Governor Rick Snyder says he sees no reason to ask for federal help anyway.

The city has $18 billion in long-term liabilities that includes $5.7 billion owed municipal work force retirees for their health care costs and $4.5 billion for their pensions. Snyder has expressed concerns for the fate of Detroit’s 21,000 municipal retirees despite the fact that the state’s constitution guarantees their pensions. The city’s union are fighting the bankruptcy petition in court.

How many other local governments are at risk of following Detroit into insolvency? The National League of Cities insists Detroit’s past governance issues and dramatic loss of population make it a unique circumstance.

“NLC research has shown that cities nationally are better off financially than they were just several years ago. Detroit should not be seen as emblematic of cities or as a harbinger of what’s to come,” the League posted on its website. The NLC says that from 1970 until 2009 just a handful of the nation’s thousands of cities, towns and villages had to seek bankruptcy protection.

Detroit’s crisis comes at a precarious time for local, county and state governments. This year the Government Accounting Standards Board, a non-profit that sets the rules for public finance, is requiring that for the first time governments add up and disclose the actual cost of meeting their long-term post-employment commitment to their workers.

Andrew Rettenmaier with the National Center for Policy Analysis calculates state and local unfunded pension liabilities are actually $2.5 trillion, compared to the half-trillion currently disclosed. Adding in the retiree health care numbers, Rettenmaier says, pushes that liability number to $3.1 trillion, “three times higher than the plans report.”

Public finance expert Dr. Mark Johnson predicts there will be major sticker shock. “Municipalities that previously appeared in sound financial condition may find that the inclusion of significant pension liabilities on the balance sheet will rattle taxpayers, investors and plan participants,” Johnson recently wrote.

No doubt the potential public finance crunch from meeting these huge liabilities will inspire calls for greater austerity, the rollback of collective bargaining and the reduction of public employee benefits. It already has in places like Wisconsin.

At the same time, local governments are feeling federal cuts via sequester and the end of the Obama Administration’s Recovery Act’s aid to local and state governments.

But is all this scarcity talk actually driven by a globally integrated economy where multinationals can play governments off each other seeking the best rate of return by shopping for the lowest tax burden? Are governments all in a kind of a race to the bottom, in a zero sum game just to get some of the action?

A few months back Senator Carl Levin, D-Mich., and Senator John McCain, R-Ariz., accused Apple, one of the nation’s biggest corporations, of doing just that. “Apple wasn’t satisfied with shifting profits to a low-tax off-shore tax haven,” said Senator Levin. “Apple sought the Holy Grail of tax avoidance. It created off-shore entities holding tens of billions of dollars, while claiming to be tax resident nowhere.”

There it is again, that theme of the special powers and privileges of residing nowhere in particular.

“Apple claims to be the largest U.S. corporate taxpayer but by sheer size and scale it is America’s largest tax avoider,” said Senator John McCain.

Apple’s CEO Tim Cook made no apology for the company’s tax strategy, which he said was entirely legal and generated tens of thousands of jobs and stockholder value.

According to the Tax Policy Center, however the big corporations are doing it, they have over the last 50 years greatly reduced the percentage of what they pay in federal taxes as measured as a percentage of the Gross National Product. In 1960 it was 4 percent but by 2013 it had gotten as low as 1.8 percent. For perspective, consider that in 2013 the revenue collected from the individual income tax was equivalent to 7.6 percent of the GNP.

U.S. multinationals are able to do their business around the world in large part because of U.S. military force protection, yet increasingly they dodge the huge bill for that protection and leave it to be shouldered by individual taxpayers.

Back in 2008, when I interviewed Senator Obama after his Cooper Union Address on market reforms needed to prevent another financial meltdown, Obama was all for global cooperation between governments to avoid the situation where one country is played off of another and there is a destructive race to the bottom.

“It is important that we get some kind of coordination and a global system in place that assures that capital is not just fleeing from one country to another to avoid oversight and avoid regulation but on the other hand endangering the economies of all,” Obama said.

Just last month Citizens for Tax Justice blasted Obama’s Treasury Department for not making public the information Treasury has on what multinationals claim to earn and what taxes they pay in each country.

Last week the G-20, grappling with Europe’s ongoing public finance crisis, resolved to better coordinate their efforts to end corporate tax avoidance through cross-border profit shifting, which causes tax base erosion.

It is hard for this story to get out there. Common business law practice now includes embracing legal fictions and shopping for the friendliest state even within our nation’s fifty. Check out the ownership structure of major news outlets and you'll learn just what a "media" mecca Delaware is.

Robert Hennelly

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Apple Bankruptcy Barack Obama Cities Corporate Taxation Corporations Detroit Editor's Picks Offshore Accounts