Free Lunch (12 page)

Bush did pull off the Rangers deal,
though. He went on to be elected governor of Texas in 1994. He used part of the profits to buy a 1,583-acre nonworking ranch near
Waco.

His financial disclosures show that proceeds from the sale of the team accounted for
most of his net worth and possibly all of it. A precise number is not possible for two reasons. Disclosure reports allow officials to
list a range of values for investments, and 1998 was the first time Bush had to file a detailed report, not like the minimal disclosure
required of state politicians in Texas. However, analysis of his income from the investments suggests at least three-fourths of his
net worth came from the Rangers deal.

Having grown rich off a sales tax, Bush was not done
profiting off the tax system, his 1998 tax return shows.

The IRS issued a directive in 1993 that
is relevant to Bush's tax return. “A partnership capital interest for services provided to, or for the benefit of, the partnership is
taxable as compensation.” The 10 percent share the partners gave Bush is just what the IRS procedural guide described. It should
have been taxed as compensation, not as a long-term capital gain on an investment. The top tax rate for compensation in 1998 was
39.6 percent, plus another 2.9 percentage points for the Medicare tax.

In spite of this clear
directive, Bush treated the entire $16.9 million from the Rangers deal as a long-term capital gain. He paid only the 20 percent rate on
such gains. The result was that after paying taxes Bush pocketed $3.7 million more than the law, and the IRS directive, seem to
allow. Treating such compensation as capital gains is, however, widespread and not often challenged by the IRS.

Under government rules, tax returns are accepted as filed unless the IRS audits and then challenges a return.
The two years that Bush's return would have been most likely to be selected for audit, 2000 and 2001, were the record low years for
audits of high-income Americans. The richest taxpayers benefited mightily those years because, at the insistence of the most
right-wing Republicans in Congress, the IRS focused on tax returns filed by the working poor. In 1999, for the first time, those who
made less than $25,000 were more likely to be audited than those who made more than $100,000. The next year the overall audit
rate, already at a record low, fell almost 50 percent. In the following year the audit rate for high-income Americans fell even more.
Bush's chances of getting audited: about one in 370. So, like the vast majority of people who fudged on their taxes, or flat-out
cheated, Bush got away with it.

Next, let's look at the other side of the story—eminent domain
from the point of view of the person whose property is taken.

T
HE GUARDS REPEATED THEIR STERN ORDERS A FINAL
TIME:
NO
movement, no sounds,
and no displays of emotion or we will march you right out of here. Do you understand?
After metal detectors and
security screenings, surrounded every moment by guards who seemed hired for their power to cast a mean look, Kim Blankenship
was thoroughly intimidated. Even if she did not recall their precise words, she felt the message. She felt as if she was wearing
inmate coveralls, not her business suit.
Does the Supreme Court humiliate everyone this
way?
Blankenship thought as she silently took her front row seat in the somber, dark chamber and sat frozen,
waiting for her case to be called.

Is there an American, feeling the sting of injustice, who has
not vowed to fight all the way to the Supreme Court? Kim Blankenship and a few other aggrieved residents of Toledo actually did.
They wanted to address an issue so fundamental that it caused the first American government to collapse more than two centuries
ago. Blankenship's case raised the question of whether the problem that destroyed government under the Articles of
Confederation had returned, posing a new threat to the pockets, and ultimately the liberties, of the people.

Blankenship was not alone in grasping the significance of the issue that brought her to the highest court in
the land. The Supreme Court accepted briefs from 38 states; New York City; Grand Rapids, Michigan; and Wayne County, which
encompasses Detroit. A host of industrial groups weighed in, too, and so did the nonprofit research organization known as the Tax
Foundation. They all opposed Blankenship.

What happened when these forces collided
should give everyone pause, both for the safety of their wallets and for how the surreal environment that pervades Capitol Hill has
reached into the highest court in the land.

As Kim Blankenship saw it, big corporations were
using the coercive power of government to take away what little bit of money and substance she and her neighbors had built up
through hard work. What justice is there, she thought, when your mere presence becomes an inconvenience to someone, or some
corporation, with the political power to have you removed, crushed like a bug?
How can they force me
to pay taxes that they give away to a rich corporation?
she thought.

Kim
Blankenship is a welder by trade, her husband Herman an auto mechanic. In 1991, when they were in their thirties with two boys to
raise, they decided to open their own business. Kim owned, free and clear, a piece of land suitable for a repair garage. Kim's Auto
and Truck Service stood on the edge of a mostly Polish neighborhood, sturdy working-class homes, some of them brick, all with
neatly kept yards, many with kitchens so clean you could eat breakfast off the floor.

Each
month the garage receipts grew as word spread that the Blankenships did honest work at good prices. Some of their customers
worked at the Jeep plant, leaving their keys for a tune-up or a new water pump and then walking to their shift at the oldest vehicle
factory in the country. By 1997, Kim and Herman had six, sometimes seven other people on the payroll. Then the news appeared
on the front page of the Toledo
Blade
—Chrysler was going to rebuild its Jeep plant,
the biggest employer in town. The 90-year-old complex, 61 buildings with leaky roofs, would give way to a gleaming modern
factory, taking advantage of experienced autoworkers and the site's easy access to shipping by rail, highway, or Great Lakes
barge. Chrysler said it would invest $1.2 billion.

Mayor Carty Finkbeiner called it a great day
because losing Jeep would have been “like the Browns leaving Cleveland” to play football in Baltimore. The mayor and other
officials campaigned for the new plant, not to create more jobs, but just to retain many of the 5,600 jobs which, with overtime and
fringe benefits, he said paid $60,000 a year each. The campaign included parades, billboards, and even a little
song:

What Chrysler cared about was not ditties, but money. In the
intensifying competition between the states to attract new investment, or to just retain existing jobs, state and local government
giveaways flourish like weeds on Miracle-Gro. Corporations have become masterful at playing one city, county, or state against
another. No one knows just how many consultants earn their fees playing the subsidy card, but state economic development
officials in North Carolina say they have a mailing list of more than 250 such consultants seeking handouts for their
clients.

Chrysler, soon to become a subsidiary of the German company that makes
Mercedes-Benz luxury cars, extracted at least $280 million in tax breaks. The state gave an investment tax credit. The city of Toledo
and its schools gave up property taxes from the new factory. That reduced Chrysler's cost for the new plant by a fourth. Chrysler
also got the city to seize land it said was needed, which is where Kim Blankenship and the Articles of Confederation come
in.

The city took 82 homes and 16 small businesses. The way the city did it made a mockery of
the Fifth Amendment protection against taking private property without “just compensation.” First the city went to older people,
some of whom had grown up hearing their elders tell in their native tongue about the awful things government had done in the old
country to people who did not know their place. Many sold fast for a fraction of what their homes were worth and moved on. When
the city had acquired half the homes, it invoked its power under the city charter to declare the area blighted, a slum in need of
clearance. That lowered the price for anyone remaining in the neighborhood who might have the temerity to fight for more
money.

Business at Kim's garage plummeted. The Blankenships would come to work and find
trucks blocking the entrance, trucks whose drivers were nowhere to be found or who said they could not move them. The
electricity would abruptly go off. The street was ripped up, making it hard and at times impossible for anyone to reach their garage.
The couple felt they were being pressured to give up and get out.

Blankenship and others
sued. They said it was unfair that the burden of supporting the state, the city, and the schools was being shifted off Chrysler and
onto them. Charlotte Cuno, whose name was listed first on the lawsuit although she did not lose her home or business, was angry
that Toledo teachers had gone seven years without a raise and that there were only two computers per school. How were her three
grandchildren supposed to get a decent education and make their way in the world? When her property tax bill doubled she
blamed Chrysler for the bulk of it.

Blankenship was even more upset because her taxes rose
and her business collapsed. “Our business has gone from $25,000 a month to $1,500, maybe $2,000, but we are still paying taxes to
support Chrysler,” she fumed. Blankenship also started thinking about how the state could tax her to subsidize not just Chrysler,
but a direct competitor, like a new garage down the street. The unfairness of it all made her apoplectic.

At the same time, Ralph Nader was looking for a case to attack corporate welfare. He read an article by Peter
D. Enrich, a professor at Northeastern University School of Law in Boston, and called him out of the blue. Nader urged the
professor to find a good case to challenge giveaways to firms like Chrysler. Enrich is not a litigator, but a scholar who specializes
in state government finances. In one of his articles, Enrich wrote:

After
talking to people around the country, Enrich decided that the Toledo residents had a good case under Ohio law that the Chrysler
deal was so unfair that it could be struck down. He agreed to represent them for free.

The suit
was filed in state court, but the state of Ohio and Chrysler got it removed to federal court to get a broader test of the subsidy issue.
The federal judge assigned to hear the matter dismissed it. The Toledo residents took their case to the Sixth Circuit Court of
Appeals.

The issue of whether Chrysler's tax breaks were unfair to competing businesses and
individuals is how the Articles of Confederation come into play. Under the first American government, from 1781 to 1788, the states
regulated commerce. They used this power to enact tariffs to protect their own businesses. Anyone trying to import, say, furniture
into New York from Connecticut faced a heavy tariff by New York, and Connecticut retaliated with its own tariffs. This economic
warfare was destroying the whole experiment in self-governance. Efforts to find a solution transformed into the Constitutional
Convention.

The Constitution grants Congress the power to regulate commerce “among the
several states.” Implied, but not explicitly stated, is the power of the federal government to block protectionist tariffs and similar
devices that discriminate. This legal theory is known as the
negative Commerce
Clause
or the
dormant Commerce Clause.
Under this theory the
Supreme Court has repeatedly struck down state taxes, and regulations that have the effect of taxes, when it found that they favor
businesses within a state and thus discourage national commerce.

Enrich argued that the
Chrysler tax breaks “distort the free flow of investment in an open national economy” and “impose high costs” in lost tax revenue.
“The inevitable result'' of such subsidies “is a significant shift of the costs of state and local government to other classes of
taxpayers” like his clients, as well as “a substantial reduction in states' and localities' ability to deliver important public services”
like education.

Among the evidence submitted to the court was a study by Kenneth P. Thomas,
a political scientist at the University of Missouri in St. Louis. He examined state subsidies to corporations. The value of many of
these subsidies is never disclosed. The states and local governments that make these gifts, and the corporations that receive
them, routinely fight disclosure of the precise terms. Once the deal is done, there is virtually no monitoring after the fact to see if the
companies uphold their part of the bargain, investing as much money as they promised or creating, or even retaining, as many jobs
as were required for the giveaways.

Professor Thomas concluded that these gifts amounted to
at least $48.8 billion in 1996. What was telling was his observation that these giveaways were worth far more than the $29.3 billion
that the states collected in corporate income taxes that year. A system that appeared to tax business was in fact a scheme to give
away $1.65 for every dollar that came in. Since the recipients of corporate welfare were paying little or nothing, while other
businesses paid in full, this was clearly a redistribution scheme favoring the politically connected, like Chrysler, who hired the most
astute negotiators.

Toledo and the state said the case was baseless. “The negative Commerce
Clause prohibits barriers, not welcome mats,” making an argument that evokes images not of red carpets, but of ones woven from
greenbacks. “Far from ‘economic protectionism,' the tax credit is freely available to all who invest in Ohio,” the city and state
argued.

Toledo and the state of Ohio even asserted that the Jeep plant giveaways complied
with a 1991 Supreme Court finding that “it is a laudatory goal in the design of a tax system to promote investment that will provide
jobs and prosperity.'' That glib line went to the very point Enrich was trying to get across—giveaways are a less-than-zero-sum
game that from the most parochial of perspectives may appear to generate benefits, but that to society overall actually destroys
jobs and undermines prosperity.

The company, by then renamed DaimlerChrysler, said simply
that it was entitled to the money. It adopted the welcome-mat theory, asserting that the tax credit “is not the type of anticompetitive
protectionist measure the Commerce Clause was meant to prohibit.''

The appeals court ruled
in October 2004 that the Chrysler tax credit was indeed a discriminatory tax that coerced companies in Ohio to not invest
elsewhere. That put the tax break in violation of the federal Constitution.