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Tuesday, October 13, 2020

Update on Boeing Subsidies

Whaddaya know? Just four days after I mentioned that Boeing did not repay the billions it had already received from the 2003 Washington subsidy package (h/t Greg LeRoy), the World Trade Organization approved EU retaliation for these subsidies in the form of $4 billion per year of tariffs on U.S. goods.

 Predictably, Boeing and the U.S. government are crying foul, saying it wasn’t fair to allow tariffs on a subsidy that had already been terminated, but not acknowledging that the company had already received about ¾ of the tax breaks the state provided for in 2003, or approximately $2.4 billion in nominal terms at the originally reported figure of $160 million per year. Note that the Times continues to report this figure as $100 million per year, while CNBC reported that the company saved $200 million in 2018 due to the tax breaks, so YMMV. In any event, it’s still a lot of money.

 Moreover, when Boeing announced the end of 787 production in Washington, Governor Jay Inslee said that the company’s “favorable tax treatment” in the state needed to be reconsidered. According to the Seattle Times, the main tax breaks saved the company $1.4 billion in 2014-2019. You can see why the European Union and Airbus complain that Boeing is still being subsidized.

 Don’t forget that Airbus is also subsidized. The WTO authorized the United States to impose $7.5 billion in tariffs annually on EU products over “launch aid” given to Airbus in the form of low-interest loans and about $4 billion in grants. As several of the New York Times interviewees noted, the dueling, WTO-approved tariffs may finally create the impetus to negotiate an end to the Boeing-Airbus subsidy war. Time will tell.

Friday, October 9, 2020

Boeing Moves More Jobs from Washington State to South Carolina

As first reported in The Wall Street Journal, Boeing is ending production of the 787 Dreamliner at Everett, Washington, and moving it to its newer facility in North Charleston, South Carolina. The company says this is the most efficient approach to reducing production of the jet from 10 per year to six per year in response to falling demand due to the coronavirus pandemic. 

Moving production to South Carolina means that more than 1,000 Boeing workers at its Everett plant will likely lose their jobs as they no longer have a model to build.

This development marks the latest step in Boeing's long-term assault on its unionized Washington workforce. When the state legislature there approved its $3.2 billion ($2 billion present value) subsidy deal for the 787 in 2003, legislators there were under the impression that they had “won” the project, that Boeing was now required to build all 787s in Washington. They were shocked and angered when the company announced that it would set up another assembly line in “right-to-work” South Carolina, complete with some $900 million in incentives, creating a plant that remains non-union to this day.

In large part, this new move became possible because this February, the company asked Washington to end the 2003 subsidy package, which had been ruled an unlawful subsidy by the World Trade Organization and upheld by WTO's Appellate Body (click on "Summary of key findings") in 2012. After getting hammered by the European Union in WTO compliance proceedings, Boeing decided it would clean its slate to be better positioned to attack EU-based Airbus for the subsidies it has received. The United States notified the WTO Dispute Settlement Body in May that Washington had terminated the subsidies in March. With no subsidy from Washington, the company no longer felt obligated to produce any 787s there. Note that there has been no indication that Boeing gave back the approximately $160 million a year it had received already under the 2003 subsidy deal.

According to the company, it did not receive any incentives to bring the remaining 787 production to South Carolina. That would be the right approach for Boeing to take if it wants to avoid further hassle with the World Trade Organization. Of course, we have seen plenty of examples where subsidies have been discovered long after a project was first announced. Think Foxconn in Wisconsin or Nissan in Mississippi. Call me cynical, but I wouldn't put it past Boeing to find a way to get a subsidy for the “new” jobs in South Carolina. After all, from 2003-2012, the company had net negative state income taxes overall nationally.

Between the runaway jobs and the World Trade Organization subsidy rulings, if there were ever a time and a company calling for no development subsidies, Boeing is it in 2020.

Cross-posted with Good Jobs First.

Thanks to Greg LeRoy for suggesting this article and for editorial improvements.

Tuesday, September 15, 2020

Report Shows Huge Cost of Tax Breaks to South Carolina Public Schools -- Up 31% in Two Years

 My colleagues at Good Jobs First released a new report today showing that South Carolina public schools are losing high, and rapidly rising, amounts of potential revenue to property tax abatements controlled solely by county governments.

Thanks to Government Accounting Standards Board (GASB) Statement #77 adopted in 2015, governments that passively lose income to "tax abatements" are required, in their Comprehensive Annual Financial Reports, or CAFRs, to list the total losses annually. Passive losses occur when they are the result of the actions of another governmental unit. The most common scenario for this comes about when a municipal or county government gives a property tax break to a company, and overlaying taxing units (school, library, or ambulance districts, for example) are required to also waive their portion of the property taxes abated.

“The Revenue Impact of Corporate Tax Incentives on South Carolina Public Schools” shows that in South Carolina, these passive losses are happening with a vengeance. The state's public school districts collectively lost a total of $423 million to property tax abatements in fiscal year (FY) 2019. That's 31% more than in 2017, an absolute increase of $99 million in just two years.

Some of the biggest losses were in the poorest school districts, as measured by the percentage of students eligible for free or reduced-rate lunches. Six of these districts lost more than $2000 per student, including four that had majority Black plus Latino student populations.

“Our members struggle to teach in crumbling schools with poor heating and cooling systems and a lack of reliable internet connections,” said South Carolina Education Association President Sherry East. “It baffles me to continuously hear we don’t have enough money to fund our schools, yet this report shows we are diverting huge pots of money that could be available if we just consider tax reform in South Carolina.” (From the Good Jobs First press release.)

 This situation has been developing for over 20 years. Reporter Jay Hancock of The Baltimore Sun described South Carolina in 1999 as having "crumbling" schools that sometimes flooded in rainstorms. Despite the problems apparent even then, the state has continued to be an aggressive pursuer of new companies (Boeing and Alenia/Vought are two Megadeal-sized example).

What can be done? The report's top recommendation is to exclude school districts from any incentive deal. This is what California did in 2012-2014 when then-Governor Jerry Brown spearheaded the abolition of tax increment financing (TIF) and signed off on a much-modified version that prohibited the use of school funds in TIFs, as well as allowing all other overlaying jurisdictions to opt out.

The second recommendation is to cap the duration (currently up to 40 years!) and cost of tax abatements, to at least reduce their outsize impact on schools. Finally, better transparency from county and municipal governments on the costs and outcome measures of subsidies can lead to improved policy in the future.

The research here is part of Good Jobs First's updating of its landmark 2018 report, The New Math on School Finance, which was the first to use GASB-77 data to address the impact of tax incentives on school budgets.

Note to the reader: I was not part of this research. But stay tuned...

Thursday, July 16, 2020

Apple skates on Irish taxes -- for now CORRECTED

On Wednesday, July 15, the European Union's General Court overturned a European Commission decision from 2016 that found Apple's tax arrangements with Ireland to constitute an illegal award of state aid (subsidies) that was incompatible with the common market, ordering the company to pay back 13 billion plus interest to the Irish government. As it has been almost four years since the Commission decision, let me refresh your memory on what brought about that outcome.

The Commission found that, as a result of negotiated advance pricing arrangements (APAs), Apple paid an effective tax rate of 1% in 2003 and just 0.005% in 2014. Since Ireland's official corporate income tax rate is 12.5%, these figures are more than a little concerning. Yet the General Court ruled the Commission had not proved that Ireland had given an advantage to Apple that it didn't give to other countries.

IANAL, but this is insane. As noted above, the APAs were negotiated, hence it is hard to see how other companies could have gotten the same deal. I'd like to hear what other firms have the right to pay just 0.005% of their profits in corporate income tax.

As I showed in 2016 just prior to the Commission decision, what was negotiated as the profit determination for the two Apple subsidiaries "non-resident" in Ireland, that is, Apple Operations Europe and Apple Sales International, had no reference to actual sales of these subsidiaries. Rather than defining "profit" as sales - costs, there was a very convoluted formula based solely on expenses, thereby making the "profit" subject to tax something very different from profit.

Then there's the question of these "non-resident" companies. According to the Wall Street Journal, "Ireland contended however that its tax rulings “did not depart from ‘normal’ taxation” because it had merely followed a portion of Irish tax code that says nonresident companies shouldn’t pay income tax on profit that isn’t generated in Ireland." Wait a darn minute! Anywhere but Ireland, a "non-resident" company is one incorporated in some other country. Apple, Inc., the parent company, is non-resident in Ireland. But Apple Operations Europe and Apple Sales International are both incorporated in Ireland, and merely managed from abroad. Ireland, contrary to the practice of any other country I'm aware of (and God help us if this practice spreads to other countries!), classifies corporations with this bizarre form of organization as non-resident for tax purposes even though they are domestic corporations by ownership. Ireland had to affirmatively create such a form of organization in order to establish a corporate form that is not taxable in any country. It is this creation of a tax-immune corporate structure that makes Ireland destructive to the world economy, a "fiscal termite" in the evocative phrase of retired International Monetary Fund economist Vito Tanzi.

One last point from the Journal: "Those rulings [the APAs] allowed two Irish-registered Apple units to attribute only a small sliver of some $130 billion in profit to Ireland in an 11-year period. The commission said all that revenue should be attributed to Ireland, but the Irish government and Apple say they split the profit reasonably, given that almost all of Apple’s intellectual property is developed in the U.S., not Ireland." No, no, no, no, no! These two Irish-incorporated "non-resident" subsidiaries actually own gigantic swathes of Apple's intellectual property, that is, the patents, copyrights, etc., embedded in Apple products. By virtue of owning this intellectual property and charging royalties to other subsidiaries for the right to use it, these subsidiaries stripped $130 billion in profits from Apple units in the rest of the world, transferring them to low-tax Ireland. To try to then turn around and claim that the profits based on ownership should be massively diluted because the software was designed in the USA makes a travesty of the very concept of ownership. The intellectual inconsistency of the Apple/Irish government position takes your breath away.

What happens next? According to the BBC, the Commission has 14 days to appeal this decision to the European Court of Justice, the EU's equivalent to the U.S. Supreme Court. Since I think the Commission's decision was correct, I hope it appeals. The Commission was upheld by the General Court on a similar case involving Fiat Chrysler in Luxembourg, but overturned by the General Court last year on another similar case involving Starbucks and the Netherlands. We'll know soon if the appeal happens.

In addition, as Richard Murphy points out, the Commission is now very far advanced in discussion of an alternative tool to get around the fact that unanimity is required for EU decisions regarding direct taxation, which includes corporate income tax. As it stands, a single country (read: Ireland) can block changes such as a minimum level of corporate income tax rate that would exist throughout the European Union. However, if the Commission adopts rules under Article 116 of the EU Treaty that allows it to correct distortions in the Single Market, these would require only a qualified majority vote rather than unanimity. But this approach, too, would certainly be challenged at the European Court of Justice by Ireland and other low-tax Member States.

Score this round for the tax avoiders. May they not prevail in the end.

CORRECTION: The BBC was incorrect in stating that the Commission had 14 days to appeal. In fact, the Commission announced Friday, September 25, that it would appeal the decision. New post to follow.

Monday, June 8, 2020

Oops! Swedish head epidemiologist "admits mistakes"

Thanks to a non-blogging friend, I found this article from Bloomberg (my quote is from the Bloomberg headline) about Anders Tegnell, the epidemiologist directing Sweden's coronavirus strategy, which has been widely praised by conservatives. The policies followed by the government were much less strict than those of neighboring countries, allowing restaurants and schools to stay open, among other things.

Unfortunately, as I've reported here, this has had the effect that Sweden has one of the highest death rates per capita in the world, at 465 deaths per million (DPM) as of its June 8th reporting. This is an increase of 29 DPM in just the last week which, as I predicted on June 2, let it pass France for the world's fifth deadliest outbreak. By way of comparison, only five countries in all of Asia have a higher death rate over the entire COVID-19 outbreak than Sweden has had in a week. The highest death rate among Sweden's Nordic neighbors is 102 DPM in Denmark. The lowest Nordic death rate is Iceland's 29 DPM. Finland and Norway fall in between at 58 DPM and 44 DPM, respectively.

Now, per the Bloomberg article, Tegnell says Sweden's approach for a future pandemic should "land somewhere between what Sweden did and what the rest of the world has done." The lack of specificity did not go unnoticed by Lena Hallengren, minister for health and social affairs. She complained that Tegnell had not said what else the country should have done.

Meanwhile, in the United States, all the states are relaxing their previous restrictions, though some much more rapidly than others. While the country has now had several days in a row with fewer than 1,000 deaths, it still has about 20,000 new cases daily. Between states' rush to open up and the massive Black Lives Matter protests, I think we will see a spike in new cases shortly.

Back in Sweden, Prime Minister Stefan Lofven has promised a full investigation into the Tegnell-designed pandemic response and resulting death toll. Stay tuned.

Tuesday, June 2, 2020

40,000+ US COVID-19 deaths in May; Swedish model looking ever worse

May brought no solace to the world, or to conservative claims about COVID-19. Another 40,000 deaths in the United States put the lie to Trump's claim that the country is doing great, while he simultaneously takes no responsibility for his weeks and weeks of denial and downplaying the pandemic. The U.S. death toll now stands at over 106,000. Sweden, for the first time in its modern history the darling of conservatives, shot up the chart in terms of its death rate. Conservative-run United Kingdom did almost as badly as Sweden in May.

DPM May 1
DPM June 1
DPM Increase
+ 154
+   49
United Kingdom
+ 170
+   87
+   65
+ 173
+   62
+   78
United States
+ 124
+   19

DPM = deaths per million

The 10* worst-performing countries by deaths per million have remained the same over the last month, but their ranking has changed. As noted in an update to my last post on the pandemic, the United States passed Switzerland on May 3. At current rates, it will pass Ireland and the Netherlands in coming weeks, and Ireland will also pass the Netherlands. Over the course of May, Sweden quickly passed the Netherlands and left it in the dust. It will pass France soon. The United Kingdom leapfrogged Italy and is set to take the #2 spot from Spain within a week.

As I mentioned last time (link above), while conservatives have lauded Sweden's refusal to go for a hard lockdown, we can see that Sweden had the highest increase in deaths per million people over the last month. Now, instead of having 64 more deaths per million than the United States, the gap has grown to 113 per million. That would equate to an extra 37,380 deaths if the United States were doing as poorly as Sweden.

The global toll is worse still. Not only are there now 377,000 deaths worldwide, but the number of new daily infections shows a fairly steady increase since April 1, rising from about 75,000 new cases globally per day then to about 100,000 new cases per day on June 1. In the same period, daily deaths have fallen from about 5,000 to 3,000. Unfortunately, deaths are a lagging indicator, and the epidemic is now revving up in developing countries such as Brazil, Peru, and Ecuador. The latter has already risen to #12 with 194 deaths per million officially, and a New York Times analysis on April 23 suggested that the true death toll was 15 times higher as hospitals had been overwhelmed and the dead were overflowing the country's emergency rooms and morgues.

As if all this isn't bad enough, Trump fiddles pours on the gasoline as the U.S. burns, in an attempt to consolidate his dictatorship now, before elections interfere with his project. I'll be writing about this very soon.

* Excluding microstates (San Marino, Andorra) and dependencies (Sint Maarten, Isle of Man, Channel Islands, Montserrat).