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New study casts more doubt on data center subsidies

A new report by Good Jobs First confirms what has been long-suspected: Data center megadeals of over $50 million in subsidies create very few jobs at a cost per job that easily exceeds $1 million. Indeed, the average for 11 megadeals going to tech giants like Google, Apple, Facebook, and Microsoft came to $1.8 million ($2.1 billion/1174) nominal cost per job.

As I have discussed before, such a figure far exceeds what a typical automobile assembly plant will receive, even though the latter creates far more, and better-paying, jobs than server farms do. An auto facility will receive something around $150-200,000 per job, and it will bring along suppliers to boot (though, unfortunately, sometimes the suppliers will also receive incentives).

The new study finds that by far the most important site location consideration is the cost of electricity and, increasingly, whether the electricity is generated by renewable sources like wind or solar. Thus, many of the biggest data centers are located in states like North Carolina (cheap coal-fired plants), Oregon and Washington (cheap hydropower). States with cheap electricity do not need massive subsidies, but they provide them, anyway.

At least, they usually do. As I have related before, American Express in 2010 announced a $400 million data center in North Carolina, without incentives. But fear not, Amex had not forgotten about using the site selection process as a rent-seeking opportunity. The reason it did not seek incentives, as far as anyone can tell (don’t forget about the inherent information asymmetry here), is that the company knew it was going to close a 1900-job call center in Greensboro, which would trigger clawbacks on the data center if it received subsidies for it. So in that case North Carolina gave no incentives for the server farm.

Not only that, Google knows how to build and expand data centers without incentives. Of course, that’s in Europe. The Netherlands Foreign Investment Agency confirmed for me that it gave no subsidies to Google for a $773 million, 150-job center opening in Groningen province next year. I was unable to get affirmative confirmation on projects in Ireland, Finland, and Belgium, but none of them show up in the EU’s Competition Directorate case database, so presumably they did not receive incentives either.

The study concludes with sensible recommendations: Transparency where it doesn’t exist, capping incentives at $50,000 per job, and knowing when to get out of subsidy auctions for these projects. Maybe simpler still, I would suggest that economic development officials just say no.

Cross-posted from Middle Class Political Economist.

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Subsidy Tracker Reaches Major Milestones

Subsidy Tracker, the free subsidy database created in 2010 by Good Jobs First, has reached major milestones in its coverage of state, local, and federal subsidies.

This month’s enhancements to the database bring it to a once-unimaginable 500,000 individual incentive awards with a cumulative nominal subsidy value of $250 billion! That’s starting to add up to real money!

I explained two years ago how to use the data from Megadeals or Subsidy Tracker to compare a proposed economic development incentive package with past subsidies given in the same industry to get some idea whether the proposal represented a gross overpayment for a given investment. This method relies on finding good matches by industry, location, unemployment rate, and so on. The more deals available to search means your chances for finding good comparables improves proportionately. This can only enhance the ability of citizens’ groups, labor organizations, etc., to independently analyze proposed costly incentive packages.

As Philip Mattera, Good Jobs First Research Director, says, the steady expansion of Subsidy Tracker “reflects the improvement in government transparency over the past decade.” I can personally remember when the first statewide transparency law was passed in Minnesota in 1995; transparency has improved exponentially since then, although there is much progress that still needs to be made.

One notable recent innovation in Subsidy Tracker is a matching system to determine the ultimate corporate parent of subsidy recipients. According to Mattera, it now includes 2,606 parent companies, a threefold increase since 2014. This is critical information, given that so many companies hide their corporate connections through misleading names.

Although transparency remains an elusive goal, it’s worth celebrating successes when they occur. Cheers!

Cross-posted from Middle Class Political Economist.

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Good Jobs First reveals top federal subsidy recipients: Subsidy Tracker 3.0

Slow to be getting to this, but I have to come back to such a major development. Good Jobs First, a national non-profit best known for its work on state and local subsidies to business, unveiled in March its Subsidy Tracker 3.0. This work differs from previous publications on federal subsidies by being project-based/firm-based, rather than program-based. This lets us know which companies have received the most federal subsidies over the years.

“Uncle Sam’s Favorite Corporations” finds that the federal government has awarded $68 billion in “grants and special tax credits” in the last 15 years. 2/3 of this has gone to large corporations. This is on top of hundreds of billions of dollars given to the banking sector during the financial crisis. One advantage of using Subsidy Tracker 3.0 is that it incorporates previous work by Good Jobs First tracking parent/subsidiary relationships.

One substantial finding is that:

Six parent companies have received more than $1 billion in grants and allocated tax credits (those awarded to specific companies), 21 have received $500 million or more, and 98 have received $100 million or more. Just 582 large companies account for 67% of the $68 billion total.

All six of the billion-recipients are in the energy sector: Spanish company Iberdrola tops the list with $2.2 billion, followed by NextEra Energy, NRG Energy, Southern Company, Summit Power, and SCS Energy. And five companies were on all three of the top 50 federal subsidy recipients list, the top 50 bailout list, and the top 50 state & local subsidy list: Boeing, Ford, General Electric, General Motors, and JPMorgan Chase.

It’s important to recognize that project-based and program-based subsidy databases serve two functions that that do not reduce to each other. If you want to know the total amount of money governments give in incentives, you need program-based reporting. This is because many subsidy programs provide benefits automatically to all investors meeting certain criteria and they rarely list all the automatic recipients. In that case, you need to know what the program as a whole is spending. This is the approach I have taken in my subsidy estimates in Competing for Capital and Investment Incentives and the Global Competition for Capital, and Louise Story took in the New York Times program database (“State Money Flow”) in its December 2012 series “The United States of Subsidies.” To understand the overall scope of the problem, you need program-based reporting.

Of course, program-based reporting can have its flaws. A number of think-tanks with widely varying ideologies have produced these reports over the years, and they appear to give dramatically different answers. In fact, as I showed in Competing for Capital (pp. 152-158), the answers are all highly consistent, as they are based on a handful of federal studies (the Joint Committee on Taxation’s Tax Expenditures reports, the Congressional Budget Office’s Reducing the Deficit: Spending and Revenue Options, and the CBO’s occasional publication, Federal Financial Support of Business). The differences, even when they are seemingly vast, stem from clear ideological choices by think-tank researchers.

To take the most obvious example, when the Cato Institute estimates “corporate welfare,” it does not include the value of subsidies which take the form of tax expenditures. This give a much smaller number than estimates that follow the JCT/CBO methodologies closely, since tax expenditures easily total 2/3 of federal subsidies (and often 90% of state and local subsidies). In Cato’s 2012 estimate of federal corporate welfare, author Tad DeHaven admits (p. 12) that tax expenditure are a “form” of corporate welfare, but he does not include them in his claimed total of $98 billion in federal “corporate welfare” annually. On the flip side, for any federal agency Cato wants to see privatized, it counts the entire budget as “corporate welfare.” This inflates the Cato estimates relative to those which stick closer to the JCT/CBO methodologies, such as Citizens for Tax Justice.

Project-based reporting, like Good Jobs First does with Subsidy Tracker and Megadeals, can find large individual recipients and projects, but it does not get you anywhere near the total amount of subsidies given by an individual government. As mentioned above, many programs with automatic tax breaks for investors do not give individualized listings of their recipients. (Hopefully this will change when the Government Accounting Standards Board releases its final tax incentive rules.) But because you can document every single individual award, you can derive an absolute baseline which is irrefutable.

The inauguration of Subsidy Tracker 3.0 is a great addition to the transparency tools brought to us by Good Jobs First.

Cross-posted from Middle Class Political Economist.

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Eleven richest Americans have all received government subsidies

A new report by Good Jobs First shows how the very wealthy in America have benefited from government subsidies as one element in building their fortunes. According to the study, the 11 richest Americans, and 23 of the 25 richest, all have significant ownership in companies that have received at least $1 million in investment incentives.

The study compares the most recent Forbes 400 ranking of wealthiest Americans with the Good Jobs First Subsidy Tracker database. Not only do Bill Gates, Warren Buffett, Larry Ellison, the Koch Brothers, the Waltons, Michael Bloomberg, and Mark Zuckerberg own companies that have received millions or even billions in taxpayer funds, 99 of the 258 companies connected with the Forbes 400 have such subsidies.

As I argued theoretically in Competing for Capital, the new report points out that subsidies for investment increase inequality as average taxpayers subsidize wealthy corporate owners. Location incentives directly put money into their pockets, which then has to be offset by higher taxes on others, reduced government services, or higher levels of government debt. Moreover, as the study notes, despite the huge amount of these subsidies given in the name of economic development, there has not been enough payback to raise real wages even back to their 1970s peak. In other words, if economic development has created so many new jobs, why haven’t wages risen?

Of course, subsidies don’t account for the biggest part of inequality. Read Thomas Piketty for the big picture on the subject. But the new report shows that large numbers of America’s wealthiest (or not so wealthy, like Mitt Romney) have benefited handily from government subsidies.

Cross-posted from Middle Class Political Economist.

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Tax haven benefits are not investment incentives

Tim Worstall at Forbes takes issue with my last post, claiming that we actually don’t know that U.S. state and local governments give more in location incentives than EU Member States do. He then says that while it is true that EU states give less in cash grants and other kinds of subsidies defined as “state aid” in EU law, these same states give more than the U.S. in other types of tax benefits. His argument then moves quickly through Ireland’s 12.5% corporate income tax (though he gives no examples) to Amazon’s European sales all being channeled through Luxembourg subsidiaries. Worstall claims that the tax advantages created by this financial gimmickry comprise a location incentive just like providing Tesla $1.3 billion to build a factory in Nevada is.

I’ve been researching U.S. and EU incentives for 20 years, and I certainly don’t expect Worstall to have read everything I’ve written on the subject, including two books. So this makes as good a time as any to clarify the terms I use and the analysis I’ve made.

My default term for my object of study is “investment incentives,” as in the title of my last book. But you can’t say that phrase multiple times on every page of the book, so I use a specific set of synonyms when I write: Investment incentive = location incentive = investment subsidy = location subsidy = development incentive and sometimes, as in the headline of the last post, simply “incentive,” though I also use that term in its more generic sense. Note that the term Worstall uses in his headline, “tax incentive,” is not a synonym, because investment incentives and subsidies more generally can take forms other than tax breaks, i.e. cash grants, low-interest loans, free infrastructure, etc.

What, then, is an investment incentive? I define it as a subsidy ( = “state aid” in the EU context) to affect the location of an investment. To get this kind of subsidy from a government, it is necessary to make an investment. An investment incentive can be contrasted with an operating subsidy (“operating aid” in the EU), which is a subsidy for ongoing operations and is, critically, not contingent on making an investment. The distinction between investment incentives and operating subsidies is crucial to what follows.

So an investment incentive requires a subsidy and an investment. Let’s now consider Worstall’s examples on these criteria. As some readers may know, Ireland for many years had a 10% corporate income tax rate on profits from manufacturing, a rate explicitly provided for in Ireland’s EU accession negotiations, and which the European Commission long accepted as being part of the country’s general macroeconomic framework rather than a subsidy (see my book Competing for Capital, pp. 94-95, for an extended discussion). Contra Worstall, I am certainly well aware that Ireland’s tax policy is a method of competing for investment; in 2000, I called it “a clear and unregulated element in the country’s competition for investment” (p. 95; italics in original).

Despite that, when the Commission ruled in July 1998 that manufacturing was specific enough for the tax rate to be considered a state aid, it ruled that it constituted an operating aid. A manufacturing company was entitled to the 10% tax rate forever, whether it made new investment or not, or even if it disinvested, as Intel has done from Ireland. Since there was no link between the subsidy and investment, it did not constitute an investment incentive. In the end, Ireland and the Commission agreed that a 12.5% tax rate that applied to all corporations would not be considered state aid. Now we no longer have a subsidy, but tax competition. (This of course doesn’t talk about the boutique deals that the EU is now investigating as possible state aid.)

One ironic takeaway is that despite the intentions and nearly unanimous views of Irish policy-makers (many of whom I have interviewed over the years), the evidence doesn’t actually suggest that the country’s low-tax policy contributed to its growth. For the policy’s first 30 years, 1958-87, Ireland grew, but no more rapidly than the rest of the EU. For almost the entire period, it had no tax on foreign multinational corporations. The famed Celtic Tiger came together when the tax rate MNCs faced was 10 percentage points higher, 10%.

What about Amazon and Luxembourg? Amazon has real operations in Luxembourg, employing about 1000 people overall. But the turbocharged financial benefits Amazon receives come not from normal operations using the lower VAT (again, tax competition, not an investment incentive), but from its use of tax haven subsidiaries. As the linked article points out, where Amazon makes its money in Luxembourg is from Amazon Europe Holding Technologies SCS, a partnership with no employees or office, which had completely tax-free profits of €156.7 million in 2013, according to the Wall Street Journal article linked above.

Moreover, according to the huge dump of leaked documents from the International Consortium of Investigative Journalists, in 2009 Amazon Europe Holding Technologies SCS paid Amazon Technologies Inc. (located in the tax haven of Nevada) €105 million in order to license Amazon’s intellectual property. By some miracle, this no-employee company managed to re-license the IP to Amazon EU for €519 million. Given Worstall’s claim in July that transfers of technology to a tax haven subsidiary have to be made at “full market value,” how does he explain the way that “no one,” if you will, raised the value of this IP by €414 million, which just coincidentally was untaxed in Luxembourg? Could it be that Amazon Europe Holding Technologies SCS didn’t actually pay “full market value”?

Worstall also makes the odd claim: “And we do regard different corporation tax rates within the US dependent upon location as being location based incentives and we don’t regard them as such in the EU.” Aside from wondering who his “we” is, I know I’m not part of it: My estimates of U.S. state and local subsidies and investment incentives most definitely do not count differences in corporate income tax rates among states as a “location incentive.” My posts on Tesla take no account of the fact that Nevada has no corporate income tax, while its home state of California levies 8.84%. Yes, it’s tax competition, as in Ireland, but if you were to call it a subsidy, it would be an operating subsidy, not an investment subsidy. I also don’t include the federal government’s many subsidies in these numbers. (Note: Writing this prompted me to go back and look at the data ICA Incentives provided me last year, wherein I found that it did include some federal subsidies. I removed them from the totals from the ASDEQ paper I cited in my last post, leaving U.S. state and local investment incentives 3 1/2 times, not 5 1/2 times, as large as EU investment incentives. See corrected post here.)

Worstall, then, is trying to mix apples and oranges. For a tax provision to be a subsidy, it needs to be a derogation from a country’s normal tax rules. Yet Amazon tells us it is “subject to the same tax laws as other companies operating” in Luxembourg. Of course, Amazon may be stretching the truth here. But if Worstall thinks that creating arcane tax haven arrangements (as in his examples of Apple, Google, Facebook and Microsoft sales flowing through Ireland for tax purposes) is the same thing as, you know, actually building things, I’m here to tell him he is mistaken. Using the same term, “location incentive,” to try to cover two completely different types of economic activity, is certain to detract from our understanding of the policy issues, not increase it.

Cross-posted from Middle Class Political Economist.

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Boeing moving 2000 jobs from Washington state

Via @BlogWood, I learned that Boeing is going to move 2000 skilled jobs away from Washington state, despite just receiving $8.7 billion (with a B) in subsidies for the years 2025-2040. Really, I’m speechless. “Chutzpah” is one of the more printable words I can think of to describe this.

You will recall that the state’s legislators were angry when their $2 billion (present value of $3.2 billion over 20 years) 2003 subsidy for the Dreamliner did not stop Boeing from putting a Dreamliner assembly line in South Carolina. So the 2013 subsidy was supposed to guarantee that Boeing couldn’t do this again.

Boeing’s response no doubt will be that these jobs are in the Defense division, not in civil aircraft. Thus they are not covered by either the 2003 or the 2013 subsidy. This has already been hinted at by a commenter on the Business Week article, wraiths13@yahoo.com.

Cross-posted from Middle Class Political Economist.

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Apple set to lose billions in EU state aid case

The Financial Times reported on September 30th that the European Commission has decided to open a formal investigation into whether Apple received illegal subsidies (“state aid,” in EU-speak) from Ireland going as far back as 1991. The FT quotes “people involved in the case” as saying that this can cost Apple billions of euros.

What the decision technically does is establish what is known as an “Article 108(2)” investigation, which means that the Commission has concluded from its preliminary investigation that state aid has been granted in violation of the EU’s competition policy rules. It is therefore opening a more comprehensive investigation. It is worth noting that if the Commission opens an Article 108(2) investigation, it almost always decides that illegal state aid was given. The only recent exception I can think of is state aid from Poland to relocate Dell computer manufacturing from Ireland in 2009, and I actually think the Commission should have ruled against that as well, as I discussed in my book Investment Incentives and the Global Competition for Capital.

As I speculated in June, one issue raised by the Commission is Apple’s “nowhere” subsidiaries created under Irish law. Both Apple Operations Europe (AOE) and its subsidiary, Apple Sales International (ASI), are incorporated in Ireland, hence not immediately taxable by the United States until they repatriate their profits to the U.S. However, they are managed from the U.S., which by the provisions of Irish tax law makes them not taxable in Ireland. It is these provisions that are at issue in the case. See, in particular, paragraphs 25-29 of the decision, especially paragraph 29: “According to the information provided by the Irish authorities, the territory of tax residency of AOE and ASI is not identified.” Richard Murphy suggests today that these corporate provisions account for the largest proportion of Apple’s tax risk.

What is especially important for this investigation (and the similar ones of Starbucks and Fiat) is that if the Commission finds that state aid was given, it was never notified in advance to the Commission. The state aid laws require that any proposed subsidy be notified in advance and not implemented until approved. Ever since the 1980s, the penalty for giving non-notified, illegal (“not compatible with the common market”) aid is that the aid must be repaid with interest. Since this alleged aid was not notified, and will probably be found to be incompatible with the common market, Apple will be on the hook for aid repayment.

As I reported in June, this would not be the first time the Commission has used the state aid law to force changes to Ireland’s tax system. In 1998, it ruled that Ireland’s 10% corporate income tax for manufacturing was specific enough to be a state aid. Ireland then reduced the corporate income tax to 12.5% for non-manufacturing firms, while raising it to that level for manufacturing (mainly foreign multinational) companies.

If the Commission rules against Ireland and Apple, this will send a signal that the European Union is going to take tax manipulation very seriously with all the tools at its disposal. It would be especially great to see one of the pioneers of arcane tax avoidance strategies taken down a notch. For Ireland, at least there would be a small silver lining from losing this case: Apple’s aid repayment would go to Ireland and help reduce its budget deficit.

Cross-posted from Middle Class Political Economist.

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Tesla deal even worse than first thought

Via an email from Greg LeRoy of Good Jobs First, we learn that the Tesla deal, as enacted by the Nevada Legislature, is even worse than announced. Aside from the widely touted 6500 jobs only being 6000 jobs for which the state is paying for, it turns out that Tesla doesn’t even have to create the jobs itself!

You read that right. Tesla gets to receive tax credits for investment and job creation not only for itself, but for any of its suppliers (“participants,” in the law’s language) that locate on the project’s huge location. Theoretically, Telsa does not even have to create half the jobs for which it will receive subsidies.

Why does this matter? Isn’t Tesla still responsible for bringing all those jobs (assuming they all come, which Richard Florida doubts) to Nevada? Yes, but it tells us that all the figures bandied about for indirect and induced jobs are just malarkey. The state claims that there will be a total of 22,000 jobs ultimately due to the project, but that depends on Tesla itself creating 6500 jobs. If the state is instead paying for some of the indirect jobs it claims would be due to the project, it is admitting that the Tesla base of direct jobs is smaller than 6000; therefore, 22,000 jobs would no longer be supported (assuming you buy into that methodology in the first place, which you shouldn’t). These multipliers are easily manipulated, and we have just gotten an object lesson in how to do that.

Amazingly, the media is not paying much attention. As far as I can tell from searching the Web and the premium Nexis news service, the only place that has picked up LeRoy’s statement is the Las Vegas Sun‘s blog. Really, this is no time for the media to be letting us down!

I encourage you to check the link to the legislation above. It is a sight to behold, and proof once again that bad economic deals are a dime a dozen, leaving the average taxpayer to pick up the slack.

Cross-posted from Middle Class Political Economist.

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Discussing Tax Increment Financing on TV

by Kenneth Thomas

Discussing Tax Increment Financing on TV

I recently appeared on a local public access TV show, Conversation with Lee Presser, discussing tax increment financing and European Union subsidy control regulations. It’s a great format, just an almost 30-minute discussion without interruption, which allowed me to explain the problems with TIF as it has been used in Missouri in great detail. We also had a shorter conversation about EU regulations to control investment incentives and other subsidies, which covered the basics of transparency, maximum subsidy rates that vary by how rich the region is, and the reduction in those rates for large projects. Many thanks to Lee Presser for having me on. If you are interested in economic development issues, I think you will enjoy the program.

(“A Conversation with Kenneth Thomas – UMSL Professor of Political Science – 10/23/12″)

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David Cay Johnston has noticed a tax giveaway through FERC

by Linda Beale

David Cay Johnston has noticed a tax giveaway through FERC

[hat tip to Tax Prof; edited to correct typo and provide links]

David Cay Johnston, writing in Tax Notes, has focused on a tax giveaway that most of us have missed–a provision that permits partnerships that own pipelines to charge consumers for a tax that they don’t actually pay, resulting in considerable profits for the partners of the partnerships with little or no accompanying tax liability. See Master LImited Partnerships: Paying Other People’s Taxes, 129 Tax Notes 1393 (Jun. 21, 2010), available for free at tax.com, here. There’s also a brief explanatory video by Johnston, here. This pipeline policy stems from the Federal Energy Regulatory Commission and a 2007 court decision upholding the shift. ExxonMobil Oil Corp v. FERC, 487 F.3d 945 (DC Cir. 2007).

As Johnston explains:

For a traditional corporate owned pipeline, these costs include the corporate income tax on company profits. However, the income taxes ofn individual investors have never before counted as a cost of providing service. …. [But] even though the MLP does not pay the corporate income tax, FERC lets MLP pipelines include income tax in the rates charged to customers. FERC policy assumes the top marginal rate. Since the only income tax paid is by individual owners, this means that the rates include the individual income tax the MLP investors owe. In other words, you are forced to pay the income taxes of the MLP investors when you buy natural gas or petroleum products that were transported on [a publicly traded partnership's] pipeline. Id.

In fact, Johnston notes, the consumers pay the partners’ income taxes “even if they are only ‘potential’ taxes.” The result is incredible profits for partners in the partnership owning the pipelines.

The math here is stunning. When rates include a tax that does not exist, the investors make out like, well, bandits. Investors in an MLP pocket 75 percent more inn after-tax profits than they would if they invested in a traditional corporation owning a pipeline. Id.

FERC lost the originall BP West Coast case, so then it just issued a statement of policy, with private meetings between commissioners and lobbyists to agree to a general rule allowing a maximum tax to be in included in the rate calculation, even if there were no business level tax to affect business profits (and only individual investor taxes, which are not costs of any business). The court allowed this new policy to survive, based on extraordinary deference to the agency, even for an arbitrary and capricious standard of review. Isn’t it clear that allowing an agency to decide that companies that operate through non-taxed partnerships can nonetheless increase their rates by a non-paid tax is an arbitrary and capririous decision that is unfair to regulated entities as well as to consumers–especially when the order of magnitude is considered–$1.6 billion a year for gas pipelines and $1.3 billion a year for petroleum pipelines. Johnston notes that such pipelines consequently have rent-like profits of 42% of revenues, four times the typical margin for the 12,000 largest corporations.

Further, this tax shifting is inflated by FERC’s own regulatory practices.

FERC has acknowledged that there is some over-collection by oil pipelines and yet it continues to grant rate hikes based not on costs, but on an index. …[T]he overcollection is pure profit except for the income tax burden, which is shifted to customers. Id. at 1395

Johnston makes two important points (paraphrased here):

1. Every industry has an incentive to get this treatment, since the “tax” is hidden from consumers and goes directly to industry investors’ bottom lines, resulting in a small charge to everybody and a huge gain to the industry investors
It would be very simple for Congress to pass this advantage along to more industries, just by a minor change to the loophole exempting industries from the publicly traded partnership provisions intended result (treating publicly traded partnerships like corporations subject to the corporate tax).

2. And he notes that such treatment of monoplies is disturbing as a matter of principle, violating “two long-standing principles of rate regulation that are fundamental to fairness and integrity”–that owners be entitled to recover costs and earn a reasonable return on equity and that customers only be charged for actdual expenses. This is a trend towards “corporate socialism, under which profits are concentrated through government action and losses are socialized through bailouts.”

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