General Electric Leaves Connecticut

  

                             

In January 2012 I put up a post about protestors in Connecticut who complained that General Electric (GE) did not pay enough taxes. At that time I did not predict that GE would leave Connecticut but in subsequent posts I did warn that if politicians listened to these protests, they might cause the giant company to leave its headquarters in the town of Fairfield, and kill the goose laying the golden eggs. 

Sure enough, after last year's Democrat budget threatened companies like GE with more tax increases and regulations, the giant company decided after Christmas to pull up stakes in Connecticut and move to downtown Boston in nearby Massachusetts. The governor of Massachusetts and Mayor of Boston welcomed GE with open arms and huge financial incentives. Ironically, it was Senator Elizabeth Warren of Massachusetts who initially spearheaded the attack on GE four years ago by claiming erroneously that the company paid no Federal taxes. Perhaps  the Governor of Massachusetts and the Mayor of Boston should now explain the economic facts of life to Senator Warren.

Once GE moves, Connecticut politicians who sought to increase GE's corporate taxes will find that GE and its employees will no longer be paying income, real estate, or sales taxes to the State of Connecticut. Those politicians who sought to require that GE increase the minimum wage by 50% for its few minimum wage employees will find that those workers will no longer have jobs. My special-needs grandson is one of those workers who in addition to his minimum wage found a safe and secure workplace with free breakfast and lunch at the GE headquarters.

Incredibly, the Governor of Connecticut or his cronies in the Legislature refuse to take any of the blame for this economic disaster. In England, there would have been a parliamentary vote of no-confidence and the Prime Minister would have resigned. Not so long ago in Japan a disgraced politician would have committed "hari kari". 

All Governor Malloy can do in Connecticut is dismiss the political hack he appointed a year ago to run the hopelessly mis-managed Department of Motor Vehicles. Is it any wonder that executives at GE balked at paying taxes to support the legion of political cronies that the Governor has appointed over the past few years, or the incredibly generous pensions guaranteed to powerful public service union members.

Below find the original General Electric post that appeared on January 7, 2012. 

Last year in Fairfield, Connecticut protestors  denounced corporate giant GE for its failure to pay corporate federal tax .  GE’s corporate headquarters are in Fairfield, and the protests drew much attention from newspaper cartoons and stories. I can see why it was hard for GE to defend itself against these charges that put it in such a bad light. It has already been stigmatized as a big bad heartless selfish business giant.

I am not an employee or representative of GE, and the company does not need me to defend it, but I would like to put the issue in a different light. In my opinion, this GE flap was a classic case of trying to kill the goose that laid the golden egg.

GE is perhaps the largest landowner in the town of Fairfield and as such pays a huge amount of real estate taxes to the town. It is also one of the largest employers in the state of Connecticut. Its employees all pay their share of real estate tax on their own homes. Even if they are renters, part of their rent goes to pay their landlord’s real estate taxes.

In addition to real estate taxes, all GE employees from CEO Geoffrey Immelt on down pay their share of Federal and State Income tax. For example, most GE employees will pay between 30 and 40 percent of their income in federal and state income tax.

The company and its employees must also pay about 13 percent of salary into Social Security. That tax is sent to Washington where instead of going into the proverbial “lock box” it must immediately be lent to the debt-ridden government in order to pay its current expenses.

It is not hard to calculate that more than 50% of the income of each GE employee goes to pay federal, state, and local taxes. On top of that, consider that all these employees pay sales tax on practically every item they purchase. Although hidden from view, our state gasoline tax must add about a dollar to the purchase of every gallon of gas.

Despite all these taxes, demonstrators still protest about the failure of GE to pay corporate taxes. Don’t they know that a corporate income tax is really a tax on consumers? Corporations merely act as tax collectors for the government. The buyers or consumers of their goods and services are the ones who actually pay the tax. For example, whenever the State of Connecticut raises the tax on cigarettes, the price of a pack goes up accordingly. The tax is always passed on to the consumer. If GE hadn’t found a way to avoid the corporate tax, the price of every light bulb, refrigerator, and auto loan would have been that much higher.

I must admit that I own 500 shares of GE stock in my retirement plan. The value of the shares has rebounded since the market hit bottom in 2008, but the current price of about $16 a share is far below its $50 value of 10 years ago. It pays a small dividend of about 2% that is also taxed by both the Federal and State governments.*

I guess that it was mainly the enormous losses that GE’s credit arm suffered in the recent financial meltdown that offset the company’s current gains and allowed it to avoid the corporate tax. I would also suspect that the company wisely took advantage of government tax credits designed to stimulate the search for alternative energy sources. I believe that GE is a very big player in the solar energy field. As a stockholder and a citizen I would rather see GE invest in energy for the future, and bonus employees who contribute to the effort, than send the money to Washington.

*Note: Since the original post, I have sold my GE stock.

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Corporate Taxes

     

Some people like to complain that large corporations like General Electric, which currently has its corporate headquarters in my town of Fairfield, Connecticut do not pay taxes. In particular, the charge against GE seems to stem from Elizabeth Warren’s successful run for the Senate a couple of years ago. In her campaign Warren claimed that GE paid zero taxes.

Actually, Warren’s claim was shown to be sheer demagogic misinformation but the myth lingers on today. Sometimes, this kind of political hot air can have serious consequences. Apparently, many Democrat politicians believe that companies like GE are cash cows that can be milked forever.

Last June the Democrat Governor of Connecticut and the Democrat controlled Legislature sought to deal with the State’s huge budget deficit by adding new taxes to large corporations like GE with headquarters in Connecticut. It appears that the strategy has backfired since a number of other states have come courting GE with very attractive offers.

If GE paid no taxes, why would those states, like blue state New York, offer rich incentives to entice them to leave Connecticut? The truth is that GE and other large corporations pay tons of taxes although their corporate tax returns are not usually in the public domain. Here’s how it works.

Any business whether a large corporation or a small sole proprietor is allowed to subtract business expenses from its gross revenues before paying a business or corporate income tax. For most of my career I was a self-employed financial advisor and every year I had to file a Schedule C along with my personal income tax return. At the top of Schedule C I would have to list my total income or revenue for the year, but then I could subtract my business expenses from the gross income to come up with my net taxable income. These expenses included salaries paid to employees other than myself, office rent, phone costs, business travel expenses, and purchases of office supplies from computers to paper.

 A large corporation like GE has all these expenses and more. Salaries, from the CEO down to the minimum wage mail clerk, are deductible. So, when the CEO gets a bonus, that reduces the gross income for corporate tax purposes, but so too does an increase in the minimum wage for low salaried employees. When the CEO and the mail clerk get their salaries, they are subject to both Federal and State personal income taxes.

GE can also deduct the real estate taxes it pays to the town of Fairfield. It is the largest taxpayer on the town’s grand list. It must pay sales tax on all purchases of equipment and supplies to the State of Connecticut. It would be a catastrophe for Fairfield and Connecticut if GE and its 3000 corporate employees left the State for a more business friendly environment.

It is true that corporations can claim expenses against income that most individuals cannot. A corporation can deduct the cost of its benefits package, including the medical insurance that is often provided to employees at low cost. It can deduct the cost of major acquisitions or at least claim depreciation expenses over time.

After all deductions are totaled, they are subtracted from gross revenues and the balance or profit is subject to corporate income tax. The corporate tax must be paid before shareholders can receive any dividends. So, the profit is taxed, and then the part of it paid in dividends is taxed again to the shareholders as ordinary income. This is why some people think that the taxation of corporate dividends is unfair double taxation.

What is left of the annual profit after taxes and dividends is then retained in the corporation for various purposes although there are limits on the amount of retained earnings. For this reason Warren Buffet’s Berkshire Hathaway Company never pays dividends. Rather than generating taxable income for his shareholders, Buffet prefers to just make new acquisitions. If the shareholders need the money, they can just sell some shares.

Finally, if a corporation has a bad year or incurs unexpected huge expenses due to things like new taxes, or government mandates, there may be little profit to tax. Many companies saw this happen in 2008 with the onset of what is now called the Great Recession. Nevertheless, it is estimated that in 2010 GE paid about a Billion dollars in corporate taxes, and almost 3 Billion in 2011.

Governor Malloy of Connecticut seems to have seen the light and has since put together a package for GE but it may turn out to be too little and too late. Instead of milking the cow, the Democrats may have killed the goose that laid the golden egg.

If GE leaves Connecticut, there will be no profits to tax. If GE leaves the State, the results would be disastrous not so much for GE stockholders, executives and other fat cats, but mainly for the thousands of ordinary people whose incomes are dependent on GE.

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Kill the Goose

     

On April 17 I put up a post entitled "Minimum Wage Madness" that claimed  that an attempt to penalize large corporations in Connecticut which did not increase their minimum wage to $15 an hour might drive some large employers like General Electric out of Connecticut. Sure enough, headlines this week in the local newspaper, "The Connecticut Post," indicated that GE and others had warned legislators who were considering a huge increase in corporate taxes, as well as the minimum wage increase, that they might actually leave.

GE was joined by huge insurance companies headquartered in Hartford, the State’s Capitol once known as the Insurance Capitol of the country. The minimum wage proposal seems to have been put aside but in a last minute rush to deal with a huge budget shortfall, the Democrat majority in the legislature decided to go ahead and create a levy on corporations domiciled in Connecticut by about $62 million.

Inevitably, such soak the rich schemes are popular but there is a risk that people will find that they have killed the proverbial goose that laid the golden egg. One legislator claimed that GE paid no Federal or State taxes, and argued that it was only fair to make the fat cats pay.

Putting aside for the moment whether GE as a corporation pays Federal or State taxes, can anyone be so dense as not to realize the enormous amount of tax revenues that GE and other large corporations generate. GE has almost 6000 employees in Connecticut alone. All of these employees from the CEO on down pay Federal and State income taxes. All of them pay sales tax on most of what they purchase in the state. All of them pay personal property tax on their automobiles and other possessions. All of them pay real estate taxes based on the value of their homes. These real estate taxes pay for the salaries and benefit packages of local police officers, firefighters, and teachers.

The corporate headquarters of GE is in the town of Fairfield, and GE is the largest taxpayer in the town. It would be a disaster for the town if this good neighbor were to leave the state. If GE left, a huge gap in the tax rolls would have to be filled. Homeowners, rich and poor, would see an increase in their real estate taxes. Even rentals would go up as landlords factor increased property taxes into rents.

Why in this country have we come to consider corporate profits as a bad thing? Why would most college graduates today prefer to work for a non-profit entity? What is wrong with making a profit, especially when it is these profits that pay for most of the things we value.

If GE leaves Connecticut, there will be no profits to tax. If GE left the State, the results would be disastrous not so much for GE stockholders, executives and other fat cats, but mainly for the thousands of ordinary people whose incomes are dependent on GE. In his two terms Governor Malloy has not been able to attract new business to Connecticut unless he doles out huge tax subsidies and credits. Why are he and the legislature creating a huge disincentive for companies currently domiciled here to leave?

The Governor and the Democrat leadership in the legislature that waited, as always, to the last minute to patch together this so-called budget should be prepared to take the blame if their strategies backfire. At the start of his first term the Governor pushed through a huge tax increase that was supposed to solve the State’s fiscal woes. In his recent campaign he pledged no new taxes but then left it to the legislature to create a number of new ones.

Congratulations to Fairfield representative Kristin McCarthy Vahey, a Democrat from Fairfield who voted against this budget. It will be interesting to see how the party leadership treats her in the future.

 PS. On an unrelated note, June 4 is the anniversary of the famous naval battle of Midway that was one of the turning points of WW II. I posted on it last year, the seventieth anniversary. If you missed it here is a link.

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Taxing General Electric

The Goose That Laid the Golden Egg                           

Last year in Fairfield, Connecticut protestors  denounced corporate giant GE for its failure to pay corporate federal tax .  GE’s corporate headquarters are in Fairfield, and the protests drew much attention from newspaper cartoons and stories. I can see why it was hard for GE to defend itself against these charges that put it in such a bad light. It has already been stigmatized as a big bad heartless selfish business giant.

I am not an employee or representative of GE, and the company does not need me to defend it, but I would like to put the issue in a different light. In my opinion, this GE flap was a classic case of trying to kill the goose that laid the golden egg.

GE is perhaps the largest landowner in the town of Fairfield and as such pays a huge amount of real estate taxes to the town. It is also one of the largest employers in the state of Connecticut. Its employees all pay their share of real estate tax on their own homes. Even if they are renters, part of their rent goes to pay their landlord’s real estate taxes.

In addition to real estate taxes, all GE employees from CEO Geoffrey Immelt on down pay their share of Federal and State Income tax. For example, most GE employees will pay between 30 and 40 percent of their income in federal and state income tax.

The company and its employees must also pay about 13 percent of salary into Social Security. That tax is sent to Washington where instead of going into the proverbial “lock box” it must immediately be lent to the debt-ridden government in order to pay its current expenses.

It is not hard to calculate that more than 50% of the income of each GE employee goes to pay federal, state, and local taxes. On top of that, consider that all these employees pay sales tax on practically every item they purchase. Although hidden from view, our state gasoline tax must add about a dollar to the purchase of every gallon of gas.

Despite all these taxes, demonstrators still protest about the failure of GE to pay corporate taxes. Don’t they know that a corporate income tax is really a tax on consumers? Corporations merely act as tax collectors for the government. The buyers or consumers of their goods and services are the ones who actually pay the tax. For example, whenever the State of Connecticut raises the tax on cigarettes, the price of a pack goes up accordingly. The tax is always passed on to the consumer. If GE hadn’t found a way to avoid the corporate tax, the price of every light bulb, refrigerator, and auto loan would have been that much higher.

I must admit that I own 500 shares of GE stock in my retirement plan. The value of the shares has rebounded since the market hit bottom in 2008, but the current price of about $18 a share is far below its $50 value of 10 years ago. It pays a small dividend of about 2% that is also taxed by both the Federal and State governments.

I guess that it was mainly the enormous losses that GE’s credit arm suffered in the recent financial meltdown that offset the company’s current gains and allowed it to avoid the corporate tax. I would also suspect that the company wisely took advantage of government tax credits designed to stimulate the search for alternative energy sources. I believe that GE is a very big player in the solar energy field. As a stockholder and a citizen I would rather see GE invest in energy for the future, and bonus employees who contribute to the effort, than send the money to Washington.