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A court would eventually level $5 billion punitive damages against Exxon—equal to a single year's profit at the time. The company appealed, chipping away at the sanction until the Supreme Court (natch!) slashed that figure to $500 million 2008.
Yet through the miracle of the tax code, Exxon would only end up paying about $325 million. No matter how negligent a company is, court judgments are considered nothing more than a business expense, and therefore tax deductible.
Last year, Senator Patrick Leahy (D-Vermont) introduced the Protecting American Taxpayers from Misconduct Act. If a court orders damages for malfeasance, U.S. taxpayers would no longer be forced to grab a piece of the tab.
Yet even in the Democratically controlled Senate, liberals realize that exposing their corporate patrons to more tax liability will go over like a dieting booth at the county fair. Leahy's bill never made it out of committee.
2. Delaware, the Cayman Islands of America
Just outside of Philadelphia sits a tax haven so egregious the Cayman Islands complain about us. It's called Delaware, a tiny state that allows American companies to set up fake headquarters so they can avoid taxes in their own states.
Delaware does it by asking fewer questions than a needle exchange. Like the Caymans, it doesn't tax assets such as royalties, leases, trademarks, and copyrights. So U.S. companies create shell firms in Delaware, then "sell" their intellectual property to them. By leasing their own inventions from these fake companies, corporations have dodged $9.5 billion in state taxes over the last decade.
The trailblazer for such schemes was WorldCom, the famed telecommunications company that imploded in 2002 after being caught cooking its books. In one scam, WorldCom pretended to pay its Delaware shell company $20 billion in royalties for the questionable asset of "management foresight." Although there were no managers in Delaware, and no real money changed hands, WorldCom was able to reduce its state taxes by hundreds of millions.
Such scheming is so commonplace that Delaware is home to more corporations (945,326) than it is people (897,934). Even the patron saint of tax evasion, the Cayman Islands, sniffs over the state's corrupt practices.
"There should be a level playing field, and Delaware should have to comply with the same standards as the Caymans," says Anthony Travers, chairman of the Cayman Islands Stock Exchange.
Johnson likens the Delaware strategy to one first professed by Clyde Barrow, the Depression-era bank robber.
"Near the end of Bonnie and Clyde, they're lying around in bed after making out, and Bonnie says, 'Anything you'd do different?' And Clyde says, 'I think we shoulda lived in one state and done our bank robbery in another state,'" says the professor.
"The answer is if you're a corporation, that's exactly what you do."
The corporate blackmail exemption
In 2006, Starbucks chieftain Howard Schultz sold the Seattle Supersonics to Clay Bennett for $350 million—with the "understanding" he would keep the team in Seattle.
Almost immediately, Bennett—who made his money by marrying the daughter of billionaire Edward Gaylord, owner of Country Music Television—asked Seattle to pony up $300 million for a new arena. The city wasn't eager because it had already spent $75 million renovating the existing arena a decade before.
Bennett decided to blackmail Seattle, using Oklahoma City as leverage. Oklahoma had no major sports team of its own. So its otherwise conservative legislature offered Bennett a huge welfare package: $120 million for arena renovations and a new practice facility.
Seattle balked. Oklahoma had a new basketball team.
Yet according to the tax code, not all entitlements are created equal. While a laid off electrician still pays taxes on his $500-a-week unemployment check, Bennett didn't pay a dime on his $120 million welfare bonanza.
This exemption only sweetens corporate incentive to blackmail states and cities whenever they consider moving. Take Toyota.
In 2002, it decided to build an assembly plant for its Tundra pickup, taking advantage of cheap labor in the south. Just like Oklahoma, otherwise anti-entitlement states like Alabama, Arkansas, Mississippi, Tennessee, and Texas stumbled over one another with monstrous welfare packages.
Texas ultimately won by offering $227 million in subsidies. The state had purchased the right to host 2,000 workers at a plant in San Antonio—at a cost of $110,000 per job.
Yet for America as a whole, the deal was a spectacular loss.
It wasn't long before Toyota closed a similar plant in California, killing 4,700 jobs and shifting production to San Antonio and Canada.
The net result: Texas taxpayers forked over $227 million so America could lose 2,700 jobs. The only winner was the Japanese auto maker, which walked away with a tax-free welfare package.
Still, Congress continues to offer blackmailers this lucrative break, though it provides no benefit to the country.
"There isn't one bit of improvement whether the Toyota plant goes north or south of the Tennessee-Alabama border," Johnson says. "Yet they will make money off the fact that there is a line between them. It's just nonsense."
Unfortunately, nonsense is the calling card of the tax code. Surely even Mitt Romney can see that.