Considering Benefit Corporations as an Integral Part of Tax Reform and our Economic Future

by Ernie C. Jolly

At a shareholders’ meeting for the fictional corporation Teldar Paper, Wall Street (20^th Century Fox, Dec. 11, 1987) antagonist Gordon Gekko argued that “greed, for a lack of a better word, is good” and that “greed, in all its forms, greed for life, for money, for love, [for] knowledge, has marked the upward surge of mankind.” Although a fictional tale, the blockbuster hit may have foreshadowed what became the dominant culture among private corporations prior to the 2008 financial meltdown.  Since the crisis, financial analysts have identified greed as the impetus that encouraged Wall Street executives to amass unsustainable amounts of financial risks. Notwithstanding its negative impact, the crisis sparked a movement that has the potential of changing corporate culture for better. Through “benefit corporation” statutes, lawmakers in several states have modified their laws to encourage more altruistic behavior among entities. This movement may have been futile if the crisis had not challenged the notion that greed is essentially good. In that vein, the time may be ripe for federal policymakers to consider ways to encourage other states to enact similar legislation.

Corporations are creatures of state statutes that define the standards for incorporation. Despite differences among the states’ corporate codes, these laws are rather consistent in compelling corporate directors and managers to pursue the single goal of increasing profits for the benefit of shareholders. Accordingly, among many corporations, profit maximization usually trumps any desire to serve a public purpose.

In April of 2010, Maryland became the first state to enact a benefit corporation statute. Currently, Maryland has been followed by 11 other states. These statutes legally allow entities to pursue interests beyond simply increasing profits for investors. According to B Lab, a nonprofit whose mission is to use the power of business to solve social problems, benefit corporations:  “(1) have a corporate purpose to create a material positive impact on society and the environment; (2) are required to consider the impact of their decisions not only on shareholders but also on workers, community, and the environment; and (3) are required to make available to the public an annual benefit report that assesses their overall social and environmental performance against a third party standard.” After electing to become a benefit corporation, corporate directors and officers are legally protected if they consider the non-financial interests of their workforce, local communities, and the environment while making decisions, even if the decisions do not yield the most profit.

Despite the flexibility afforded to them on the state level, benefit corporations are treated by the Internal Revenue Service as any other for-profit entity, and donations to them are not deductible as they would be if given to a charity. Therefore, a benefit corporation’s income is fully taxable, and their investors and donors are not provided the same tax incentives as traditional charitable donors. As the House Committee on Ways and Means considers comprehensive tax reform, the Committee should also consider organizing hearings on benefit corporations. If this current tax treatment is eventually changed, there may be both more incentive for entities to adopt the new corporate form, and more pressure on state legislatures to jump on the bandwagon.

Ernie C. Jolly is a spring 2013 intern at the Joint Center for Political and Economic Studies and a second-year law student at American University’s Washington College of Law.

Fairness Within the Economic Recovery

by Wilhelmina A. Leigh, Ph.D.

June of this year will mark the third anniversary of the official end of The Great Recession, the month when the downturn bottomed out and the economy started to grow again.

With the recovery, as during the recession, however, disparities by race/ethnicity have persisted in economic outcomes such as employment, and will continue to do so unless determined efforts are made to reduce or eliminate them, and the impacts of these efforts are closely monitored.

The economic recovery is currently gaining steam.  During the fourth quarter of 2011, real U.S. gross domestic product, or GDP (the output of goods and services produced by labor and property located in the United States), increased at an annual rate of 3.0 percent.  This rate of growth was faster than at any point during the last year and a half and nearly equals the average annual growth rate of GDP over the last 60 years of 3.25 percent.  In addition, unemployment rates have declined even for groups such as African Americans, who were not seeing much of a decline earlier in the recovery.  In the wake of the recent recession, the unemployment rate for the nation peaked in October 2009 (at 10 percent), while the rate for African Americans did not reach its peak until August 2011 (at 16.7 percent).  In February 2012, the unemployment rate for African Americans was 14.1 percent, while the national rate was 8.3 percent.

How can we channel the economic recovery to more completely benefit all Americans?  One way is to monitor existing and new federal, state and local programs and policies for the extent to which they can and do foster economic equity among racial/ethnic groups. An analysis by PolicyLink of proposals in the 2013 Obama budget highlights programs that are promising in this regard. For example, the Partnership for Sustainable Communities—an interagency collaboration among the Department of Housing and Urban Development, Department of Transportation, and Environmental Protection Agency—would redevelop communities to reduce barriers for low-income households to access jobs, schools and affordable housing.  The Pathways Back to Work Fund, another 2013 budget proposal, would provide funding for subsidized employment and work-based training for low-income youth, the long-term unemployed and low-income adults. Among the wish list of programs that presidents’ budgets too often become, initiatives such as these should, first, be supported and then, once enacted, be monitored for their effectiveness.

Racial/ethnic economic disparities will not be lessened or eliminated without conscious action.  We justify not addressing these longstanding disparities during recessions because we lack resources to do so.  We cannot justify the failure to act during periods of economic growth. Thus, we should insist that such action is evident during the coming recovery.  As Alan Krueger, chairman of the President’s Council of Economic Advisers noted recently, “Restoring a greater degree of fairness to the U.S. job market would be good for businesses, good for the economy and good for the country.”

Wilhelmina A. Leigh is Senior Research Associate of the Economic Security Initiative of the Civic Engagement and Governance Institute at the Joint Center for Political and Economic Studies. More information on Dr. Leigh and her work can be found at the Joint Center website.

And What About Tax Expenditures in Deficit Reduction?

by Wilhelmina A. Leigh, Ph.D.

The Budget Control Act of 2011 (P.L. 112-25), signed into law on August 2, 2011, mandates that a Joint Select Committee on Deficit Reduction be constituted (with 12 members of Congress) to identify ways to cut $1.5 trillion from the federal budget over the next 10 fiscal years (2012-2021).  The available options for achieving this goal are reducing spending, increasing taxes, and reducing tax expenditures.  While it is usually straightforward to determine who will bear the brunt of proposals to cut spending or raise taxes, it is more difficult to make this determination with proposals to reduce tax expenditures.

Tax expenditures are the deductions, exemptions, or credits allowed via the U.S. tax code to subsidize certain politically and socially desirable activities.  These expenditures primarily benefit individuals with higher incomes.  However, choosing to reduce the federal budget by paring the most costly tax expenditures is likely to have undesired consequences for lower-income populations and for African Americans and Latinos, two groups who are disproportionately low-income.

The two most costly tax expenditures are the exclusion from taxation of employer contributions for medical insurance premiums and for medical care and the deductibility from individual income of mortgage interest paid on owner-occupied homes.  According to the Office of Management and Budget, between fiscal years 2011 and 2015, these tax expenditures are projected to account for $1.7 trillion in forgone revenue—$1.05 trillion from the exclusion of medical premiums and $0.64 trillion from the deduction of mortgage interest.  

Removing or reducing the tax advantage of employer-sponsored medical insurance could reduce the likelihood that workers have health insurance. According to the Kaiser Commission on Medicaid and the Uninsured, in 2009, two of every five among the 40 million workers with annual income less than $20,000 had employer-sponsored coverage, in contrast to 86 percent of the 60.2 million workers with incomes of $40,000 or more.  Thus, though employers’ responses to changes in this feature of the tax code would affect a greater number of higher-income workers, 16 million low-wage workers could be affected as well.

Limiting the ability to deduct home mortgage interest payments from taxable income could reduce the incentive to own a home, the major form of wealth among U.S. households.  A recent study by the Pew Research Center found that in 2009, among white households, home equity constituted 38 percent of net worth (defined as assets minus liabilities/debts).  Home equity accounted for greater shares of wealth among African American households (56 percent) and Latino households (55 percent), even after accounting for losses due to the Great Recession.  Thus, reducing the incentive to own a home could disproportionately reduce the wealth of African Americans and Latinos.

Like the path to deficit buildup, the path to deficit reduction will be long and winding.  As we embark on this path, we should be alert to the possible consequences of all proposals for persons at lower income levels.

Wilhelmina A. Leigh is Senior Research Associate of the Economic Security Initiative of the Civic Engagement and Governance Institute at the Joint Center for Political and Economic Studies. More information on Dr. Leigh and her work can be found at the Joint Center website.

Amid Struggling Economy, Environment Still a Priority

By David Bositis, Joint Center Senior Political Analyst

Recent surveys and news reports have suggested that Americans have lost their appetite for protecting the environment and dealing with climate change. Nothing could be further from the truth.

At the present time, the discussion of public support for legislation to reduce emissions related to global warming is being juxtaposed against the government dealing with the country’s economic crisis. The suggestion that climate change legislation cannot be enacted because that somehow will harm the economy is false for many reasons.

First, the provisions in the current climate change legislation are not intended to take effect until the economy has recovered from its current downturn. Further, climate change legislation does not represent a threat to the economy; on the contrary, in the future, green jobs will represent a major source of new employment in the U.S.

Second, The notion that the Obama Administration is not focused on the jobs and the economy is partisan critique, nothing more. President Obama proposed and his allies in the U.S. Congress successfully enacted a massive–and historic–stimulus bill to deal with the economic crisis almost immediately after he assumed office. His administration is still strongly focused on the economy with plans to redirect some of the money appropriated for TARP (Troubled Asset Relief Program) toward job creation efforts.