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How Cities and States Can Cure Their Budget Deficits - 1,000 Times the Value of the Tobacco Litigation

1st Published 4/14/03; Last Update: 11/17/07 5:15 pm

Many Hundreds of Billions of Dollars Are Being Thrown Away Needlessly by State, City and County Governments

During periods of economic contraction, when the vast majority of citizens and residents are suffering from reduced income and a reduced standard of living, it is difficult for state, city, county and other local governments to reduce their spending. The reasons are essentially political, it seems, and identifying these reasons is not the purpose of this article.

Instead, this article is designed to show politicians how to have their cake and eat it too. I'm going to point out to politicians two previously untapped sources of revenues for state, city, county and other local governments which will make the Iraq War II (4/03) wealth of Saddam Hussein and his sons, other relatives and henchmen appear to be no more than a few multiples of our Enron problem.

The cost of collecting these new revenues is probably in the order of 1% to 5% of the money to be collected.

The persons who owe the money have no problem in paying the moneys. After all, the money owed is no more than the spoils of violating the nation's tax and antitrust laws during the past 20 years or so.

It should be noted that the attorney or corporation counsel for a city, county, town or village or the state's attorney general is empowered by law to commence these lawsuits without seeking legislative approval. In other words, there is no need to put together and maintain a political consensus to obtain this available budgetary funding. To obtain the sought-after funding, the attorney only needs to obtain the approval of the judge when the corporation makes its predictable motion to dismiss (and later a jury, if the matter cannot be settled).

More significantly, possibly, individual taxpayers appear to be authorized by law to commence these suits in various states (I'm not sure about all states) on behalf of any governmental authority except a state agency or state (because at the state level a taxpayer's tax contribution is deemed de minimis as to the total amount being collected by the state). See my related website material at: Taxpayer Actions to Sue on Behalf of a City, County, Town or Village When the Goverment Is Unwilling to Sue.

It seems quite possible that law firms might be interested in handling this type of litigation on a contingent-fee basis similar to the tobacco lawsuits, so that the expense of recovering the billions of dollars by any state (and lesser amounts by any city, county, town or village) government might be negligible in comparison to the amounts involved.

It should be noted that the two proposals below would tend to create additional tax revenues for the governments involved by stimulating business conditions for the companies trying with little or no success to compete against the major corporations which are violating the Robinson-Patman Act and failing to pay their fair share of taxes.

The Two Proposals

Here is the first of the two proposals for any state, city, town, village or county to readily balance its budget for the next 10 years:

First Proposal: Audit The Tax Returns of Each of the Nation's Top 1,000 Corporations for the Past 10 Years

Preliminary Discussion

Several points have to be made before discussing the proposal.

  • Normally a statute of limitations prohibits a litigant to go back more than 1-6 years as to events giving rise to liability. The periods of time, known as "statutes of limitations", vary from state to state and under federal law. But under the law of most if not all jurisdictions, fraud extends the statute of limitations for extended periods of time. Accordingly, my selection of 10 years to go back for tax audits is merely a suggestion to place a limit of that type on the budget-balancing activities I am suggesting.

  • Tax authorities (federal, state and city) do not have the resources to review the tax returns of even one major corporations, no less 1,000 major corporations. As a result, any "audit" of major corporations is necessarily incomplete and slightly more than a gesture by the tax authorities. On the other hand, audits of individuals and small businesses necessarily is almost 100% because of the small size of the tax returns of most individuals and most small businesses. As a result, the largest corporations in the United States know that they can successfully reduce their taxes because of the lack of the various governments to do anything to counter the false and misleading tax returns being filed by them. The unfairness for this disparity in treatment is obvious, but so is the ever-increasing amount of unpaid taxes which can be collected by any tax authority which is willing to set up the agency to do the job.

  • On 4/15/03, MSNBC cable television news reported that tax criminal prosecutions are down 50%, and that civil tax suits for recovery of federal taxes are down to 181 during 2002 from 2,900 suits 10 years ago; and that amounts recognized as owed but unpaid total $280 billion and growing. The reasons offered were the growing complexity of the tax laws (which of course means that major corporations are construing these complicated laws in their favor and waiting for someone to come in and challenge them, at which point they will compromise their tax liability and come out way ahead); corporations are reporting less taxable income to the feds (having a related impact on state and local income tax collection activities); and Congressional pressure on the IRS has resulted in less pressure for major corporations to pay their fair share.

  • All this means is that there is a large amount of room for state and local governments to take over and get their share by by-passing their dependence on federal collection and enforcement activities. Also, the report stated that only 1 out of 175 taxpayers is audited, which of course probably means that none of the top 1,000 corporations is fully audited at all, unlike the 1 out of 175 individual or small-business taxpayers who/which is chosen for audit.

  • Also, the IRS is focussing on techniques used by wealthy individual taxpayers to reduce their tax liablity through various tax avoidance schemes, and not dealing at all (or to any great extent) on the schemes of major corporations to avoid paying federal (and therefore state and local) income taxes having up to 1,000 times the financial impact.

  • As a final preliminary observation, inasmuch as the major corporations have during the past 10 years or so been taking their own tax cut (by reporting less and less liability for federal, state and local income taxes), does anyone see any proof how such de facto tax cut has produced the benefits promised for a legal or official tax cut for the same corporations?

Corporations basically are moving more and more of their income to offshore operations and more and more of their expenses to United States operations, resulting in lower and lower taxable income in the United States. Some major corporations (with billions of dollars in earnings) have really pushed this concept and report no taxable income at all. If interested, you could begin by reading an article in the Beacon Journal on how major corporations in Ohio are avoiding hundreds of millions of dollars in taxes, and how cracking down on the tax avoidance schemes is not apt to hurt Ohio, at 11/05/02 Beacon Journal Article on Ohio's Loss of Tax Revenues from Major Corporations. The report states in part:

The corporate franchise tax -- Ohio's corporate profits tax -- has been withering. In the mid-1970s, the levy accounted for 16 percent of the taxes supporting the state's main fund for operations, its General Revenue Fund. Last fiscal year, the amount had fallen to 4.6 percent. Though increases in collections from other taxes are a major part of the change, revenues from the corporate franchise tax now have declined for four years in a row. Adjusted for inflation, they are below even the worst recession year of the early 1980s.

You may think that is because companies aren't making as much money, and that is certainly part of it. But the decline started when the economy was still booming. Changes in Ohio law that weakened the tax and wide-scale tax avoidance by multistate companies have contributed importantly to the decline.

Companies are able to find legal ways around the tax. A common tactic involves shifting income to subsidiaries in other states that will not be taxed as heavily as the Ohio affiliate would be. The Ohio Department of Taxation estimates that the state would take in roughly another $200 million a year under the tax if it adopted a rule followed in California and 15 other states. That rule requires each company to report on its operations as a combined entity, eliminating transactions between various subsidiaries.

Also, see the following books available through Amazon:

  • The Cheating of America: How Tax Avoidance and Evasion by the Super Rich Are Costing the Country Billions--and What You Can Do About It by Charles Lewis, list price: $13.95

  • The Great American Tax Dodge: How Spiraling Fraud and Avoidance Are Killing Fairness, Destroying the Income Tax, and Costing You by Donald L. Barlett, James B. Steele (Paperback)

Also, see a July 2002 report by The Cato Institute at July 2002 Cato Institute Report entitled Runaway Corporations: Political Band-Aids vs. Long-Term Solutions. The political issues are probably legal issues which can be resolved in favor of a state attorney general seeking his/her state's fair share of a global corporation's profits.

All that a government has to do to start a torrent of newly-found tax revenues to pour into the coffers is to put together a team of professionals to focus exclusively on the tax returns of these 1,000 for the past 10 years.

If one corporation has unlawfully reduced its federal income taxes by $1 billion each year for the past 10 years (for a total of $10 billion), New York's missing share would be perhaps 10% of the $10 billion - or $1 billion plus penalties and interest, raising the amount to a few billion dollars for the single corporation involved. 1,000 corporations times a few billion dollars would be a few trillion dollars, enough to put New York on easy street for an extended period of time (assuming there was no political push to reduce unneeded spending).

The cost for auditing a single corporation for one year might well be (and I'm guessing) 10 professionals, at a cost of $50,000 per year per person, on the average, or $500,000 to audit one year's returns, and $5,000,000 to audit all ten years.

A group of states could join together and jointly fund the needed financing, so that New York (for example) would only pay about 10% of the $5,000,000 total.

Settlements would undoubtedly be offered which would make cessation of the audit and attendant costs look desirable, and the governments involved would have to determine if the settlement is reasonable, perhaps by making estimates based on the earnings reported versus earnings of competing companies, and an analysis of problem areas of the returns to get a rough fix on the size of the unpaid taxes which might be involved.

One could begin to wonder why ordinary citizens are taxed at all (at least below a certain dollar amount of income) when there is so much uncollected tax which could be used to replace the tax payments of the poorest tax-paying citizens and residents.

Anyway, at a time when there is a threat to the health and wellbeing of the citizens and residents of New York and other states because of a shortfall in taxes, the politicians can cure the problem overnight, by collecting the amounts which have been wrongfully withheld from the state, city, county and local governments throughout the United States.

At a time when rights (such as copyrights, patents and trademarks - ultimately no more than giving rise to monetary claims in lawsuits) are considered sufficient as collateral or assets to back bank loans, we should explore other rights to sue for assets which are escaping from our governments in their budgeting process.

Uncollected taxes and fraud create monetary rights similar to rights for infringement of copyright, patent and trademark laws.

Major corporations make billions by overcharging for goods making use of valuable patents, trademarks and copyrights, and use creative accounting and tax techniques to deprive governments (and the same people) of the proper taxes due.

It seems only fitting for governments to get a little creative themselves, in this time of growing financial need, to look at rights to balance governmental budgets, and reduce the oppressive impact which is currently falling on individuals and small businesses.

Second Proposal: Sue Manufacturers and Major Retailers for Violation of the Robinson-Patman Act, Which Price-Discrimination Violations Are Causing Monetary Losses to State, City, County and Other Local Governments

Preliminary Observations

Carl E. Person, Editor, LawMall, carlpers@lawmall.com
For the c.v. (resume) of Attorney Carl E. Person, click on Carl Person C.V.

Copyright 2003-2007 by Carl E. Person