Asset Building

Alabama  State Sen. Gerald Dial received a lot of press when he proposed the elimination of the grocery tax. (For instance see here and here and here) How progressive of a “conservative Republican,” right?

Upon greater analysis, his plan did not look so progressive or compassionate. “Sen. Dial’s plan calls for phasing out the 4 percent sales tax on groceries over four years while at the same time raising the sales tax on non-grocery items from 4 percent to 5 percent.”

The critique actually started when his fellow GOPer Represenatative Dwayne Bridges withdraw his support of Dial’s plan because he recognized the Dial proposal was actually a tax increase.

Ever since, the newspapers have piled on. The Mobile-Press Register editorial board wrote:

Our problem with the plan is that it may not accomplish what it’s supposed to do, which is to make it easier for the working poor to buy what they need. If eggs and milk are less expensive, but laundry detergent and toilet paper are more costly, then what’s the point?

The Birmingham News concurred:

For starters, removing the state sales tax on food and making up for it with a higher sales tax on other goods hurts those who stand to gain the most by getting rid of the food tax. Obviously, they buy other things, so the higher sales tax would cut into whatever gains they made by not paying a state sales tax on food. That defeats the purpose of eliminating the food tax, or at least some of it.

And the Huntsville Times questioned his proposal along the same lines:

Removing the state sales tax on groceries would save $4 on $100 worth of groceries a week, or $208 a year. The savings would be $312 a year for a $150 average weekly grocery tab.

That can mean a lot to a poor family. And remember, rich and middle class shoppers would get the grocery tax break as well.

But while milk and vegetables would be less expensive, the cost for shoes, shirts and toilet paper would go up. What, then, would have been accomplished?

An editorial in the Birmingham News was fairly blunt:

Democrats for years have tried to exempt food from sales taxes, hoping to make up for the lost revenue by nixing the federal income tax exemption. Republicans always balked, saying it would hurt the wealthy and the middle class. Now they turn around, in the name of the people, and heap more burden on … the people.

And the poorest of them, at that.

This is not about Republicans and Democrats. It is a scam no matter what party backs it. And it’s bad for Alabama.

Because like it or not, the people of Alabama still are Alabama.

Perhaps someday our leaders will realize that preying on the people is not the best way to lure new business or brainpower or opportunity. A state that fails to value its own citizens is not really an attractive destination.

So no, Sen. Dial. We’re not buying your disingenuous grocery bill. Not this time.

I had tweeted my criticism of this bill on November 27 and, that same day, even suggested to radio-talk show host Dale Jackson that we should eliminate the grocery tax and replace with a internet sales tax. I had also suggested such, in more detail, on an online Facebook forum called Clay County Politics. Senator Dial must not have liked my suggestion or criticism because he posted something along these lines:

Alabama already taxes internet and catalog sales if they have a physical presence in the state. The federal government will not allow us to tax others. Any lawyer that knew what they were talking about would know this unless they got their law degree over the internet. It is easy to sit in the stands and complain about those trying to make a difference.

(This is not the exact quote but very close; Clay County Politics went offline for some reason so I cannot retrieve the exact quote.)

(UPDATE: Here is the exact quote (sic): “We in Al require both catalog and Internet sale tax collection if the seller has a location in the state . The fed govt will not allow us to collect from others . I would think anyone with a law degree would know this unless their degree came from the Internet “.it is so easy to set in the stands and critics those who are trying to play-make a difference”)

Nevertheless, here was my response:

Sen. Gerald Dial, I will refrain from the snide retort for which your post deserves and get right to the point. The Supreme Court case on point is Quill v. North Dakota, which ruled that out-of-state retailers without a “nexus” with the state are exempt from that state’s sales tax. Today, stores such as Books-a-Million pay a state sales tax on internet sales because they have brick-and-mortar locations here. (Although their internet operations, I believe, still avoid county and municipal taxes.) However, Internet retailers such as Amazon and Overstock do not remit any sales tax under current Alabama law.

The National Conference of State Legislatures estimates that Alabama will lose $357 million in 2012 by un-captured internet sales tax. More modestly, a Tennessee study estimated Alabama will lose more than $170 million in 2012.

Amazon, Overstock, and, possibly, E-bay sales could be subject to Alabama sales tax though. A sufficient constitutional “nexus” does exist because they have “affiliate”/third-party sellers within Alabama. (Admittedly, e-Bay is not as strong a case.) Sen. Dial, appropriate state legislation is all that is needed to cure this. New York, Rhode Island, North Carolina, Illinois, Arkansas, Connecticut and California all have legislation which taxes Amazon and Overstock for sales through their websites. If the internet retailers have “affiliates” or affiliated companies based within their borders, these states require the online retailers to collect sales tax. To my knowledge, no court or state Attorney General, that has reviewed this type legislation, have agreed with your constitutional objection. (And if Amazon gets cute and tries to terminate the affiliate nexus, then include a requirement for the Amazons to report the sum of all purchases through them by Alabama customers to the Department of Revenue.)

So, Sen. Dial, contrary to your post, the legislative actions I suggest are perfectly constitutional and lawful. Not only that, I believe my suggestion accomplishes several goals: grocery taxes are largely lifted, not just shifted, off the poor, the state budget is not harmed, and the playing field between locally-owned retailers and internet retailers is leveled.

On the other hand, I question whether your proposal accomplishes the goal of removing taxes off the poor. As noted, by the Montgomery Advertiser yesterday:

But Dial’s proposal really doesn’t do much to help low- and middle-income working Alabamians. And in fact, it could hurt the poorest of them. By shifting the sales tax to other goods, working Alabamians in the middle and at the bottom of the wage scales wouldn’t really gain much, if anything. Whatever they would save on sales taxes on groceries would be offset by the higher sales taxes on other items. But consider the impact on Alabamians with really low incomes — those who qualify for federal food stamps assistance. Groceries purchased with food stamps are already exempt from sales taxes. So these families would actually be hurt by Dial’s bill because they would get little or no benefit from removing the state sales tax on groceries, but they would have to pay the higher tax on other items.”

So while there may be objections to my proposal, the lawfulness and constitutionality is not one of them.

By way of example, here is a copy of the North Carolina statute:

Mail Order Remote Sales. – A retailer who makes a mail order remote sale is engaged in business in this State and is subject to the tax levied under this Article if at least one of the following conditions is met:

(3) The retailer has representatives in this State who solicit business or transact business on behalf of the retailer, solicits or transacts business in this State by employees, independent contractors, agents, or other representatives, whether the mail order remote sales thus subject to taxation by this State result from or are related in any other way to such the solicitation or transaction of business. A retailer is presumed to be soliciting or transacting business by an independent contractor, agent, or other representative if the retailer enters into an agreement with a resident of this State under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an Internet Web site or otherwise, to the retailer. This presumption applies only if the cumulative gross receipts from sales by the retailer to purchasers in this State who are referred to the retailer by all residents with this type of agreement with the retailer is in excess of ten thousand dollars ($10,000) during the preceding four quarterly periods. This presumption may be rebutted by proof that the resident with whom the retailer has an agreement did not engage in any solicitation in the State on behalf of the seller that would satisfy the nexus requirement of the United States Constitution during the four quarterly periods in question.


UPDATE: Richard Shelby admitted that Cordray was “well-qualified” at hearings.”

Remember when Sen. Richard Shelby thought the politics should be eschewed in the nomination process. For instance, in 2005, he proclaimed:

Far too many of the President’s nominees were never afforded an up or down vote, because several Democrats chose to block the process for political gain. Inaction on these nominees is a disservice to the American people.”

Or when in February 2005, Shelby specifically promised his constituents in Tuscaloosa that he’d do “whatever it takes” to confirm Bush’s judicial nominees, including killing the filibuster.

Now that the White House isn’t occupied by a Republican, things have changed. President Obama has nominated former Ohio Attorney General to head the Consumer Financial Protection Bureau. But he cannot get a fair hearing:

But when he appears before the Senate panel, he’ll be stepping right back into that glare, knowing full well he’s got a tough road ahead of him. That’s because a filibuster-proof bloc of Republican senators headed off the White House in May, announcing their plans to block any nominee to head the bureau unless several changes were made to it.

There is no indication that the opposition of 44 GOP senators is wavering. In fact, they argue that the nomination of Cordray is pointless now, as any selection will be ignored without those changes in place.

“Opposition to or support of Mr. Cordray’s nomination will become relevant as soon as the president agrees to make the structural changes we’ve requested,” said Jonathan Graffeo, the spokesman for Sen. Richard Shelby (R-Ala.). “Until then, Sen. Shelby and his colleagues stand firmly behind the statement they expressed in their May letter: No accountability, no confirmation.”

In other words: no confirmation if we don’t get our way. Is that blocking nominations for political gain?

It appears that the Senate panel will actually vote on this nomination on October 6.

Democrats have the votes to move Cordray’s nomination out of the committee to the Senate floor, but that will likely be as far as it gets for the foreseeable future as political tensions remain high over the creation of the CFPB.

Republicans have promised to block Cordray’s confirmation by the full Senate unless the Obama administration agrees to change the structure of the agency. . .

Republicans have not focused on his record when objecting to his nomination, saying they will oppose any nominee.

As expressed by Congressman Barney Frank:

“Senate Republicans are not entitled to use the confirmation power as a bludgeon to get their way when they cannot do so through the normal legislative process,” Frank wrote in The Washington Post. “We’re going to see an extraordinarily qualified administration to an important consumer protection agency be trashed by the Senate Republican minority because their primary goal is to ensure that financial institutions are not troubled by what they may see as an excessive concern for consumer fairness.”

So why do Alabama families need an effective CFRB?

At a time when the nation’s leaders are providing more political rhetoric and party criticisms than actual solutions to the nation’s employment issues, it’s encouraging to see a city making an effort to fend for itself.

So concludes an article in the San Francisco Chronicle about the City of Richmond efforts to develop good jobs for its citizens which also build wealth.

Jobs, Jobs, Jobs is not enough. We need Good Jobs, Good Jobs, Good Jobs! As evidence by Rick Perry’s “Texas Miracle,” the quality of the jobs is as important as the quantity. Commenting upon the Texas job growth under Perry: “We have created jobs, but they are not jobs with good wages and benefits,” said F. Scott McCown, executive director, Center for Public Policy Priorities.

Similar to Cleveland, the City of Richmond is looking to add jobs and also build a “true ownership society.”

In nearby Richmond, a city of 120,000 residents with a 17 percent unemployment rate that is nearly twice the national average, city officials are trying different things.

The city has embarked on a program to help promote the growth of co-op businesses to create job opportunities and provide avenues to create stable incomes for unskilled and hard-core unemployed residents. . .

“Even in good times, Richmond has high unemployment,” McLaughlin says. “In hard times, cities like Richmond suffer even more.”

The city’s efforts have resulted in standing-room-only meetings at the city’s main library. City officials are discussing a plan to award extra points to local co-ops in city contract bids.

McLaughlin said the city could act as a conduit by hiring co-op businesses to provide services to the city.

City officials are now re-working a vendor ordinance that would allow a health-food truck co-op onto city-owned property.

The city Chamber of Commerce and its traditionally conservative Council of Industry have also expressed interest in the co-op project.

“Everybody is looking for alternatives and new ideas to stimulate business, and this is one of them,” McLaughlin said. “We can’t continue with the same strategies, and these co-ops offer the chance to create new jobs and build personal wealth.”

The program is still in its infancy, but there are already more than a half-dozen co-op efforts under way.

To have long-term prosperity, I have often suggested that Alabama must purposely pursue an authentic Ownership Society through revitalizing locally-owned businesses and rebuilding wealth-producing assets to the poor and working people.  Cleveland, Ohio is forging ahead with a model for Alabama that accomplishes both.

“Business is realizing the power of placing ownership in employee hands. Instead of fixing a broken system, a few innovative communities are creating a whole new system altogether, one that‘s profitable, sustainable, people-focused, creates good jobs, and rebuilds dying communities.”

Here is a recent TEDx lecture about the Cleveland “miracle”:

Former President George W. Bush often advocated the development of an “Ownership Society,” for him, a restructuring of Social Security with the stock market.  I have often suggested that Alabama Democrats must forcefully promote a Ownership Society itself. I am not suggesting we turn Social Security into a stock market funding scheme; we need a set of policies which rebuild wealth-producing assets for low- and middle-classes. From incentivizing lending to microbusinesses to empowering savings accounts for children, Alabama Democrats can help return economic power, entrepreneurship, and financial independence to those not deemed “too big to fail.” Why?

Washington University scholar Michael Sherraden first proposed the modern concept of “asset building,” as it is often called, in his 1991 book, Assets and the Poor. Sherraden argued that while income is necessary to escape poverty, it is not sufficient. Without assets–savings, a home, land, small business, education and skills, investments, a retirement account–it will be difficult, if not impossible, for the poor to permanently achieve financial security, especially across generations.

In addition, Sherraden argued that asset ownership–distinct from income flow–changes the way people think and behave and ultimately affects a range of social outcomes.

This month’s Fast Company magazine highlights another policy which would economically empower the working people of Alabama.

Remember Plantation Patterns, the profitable patio-furniture manufacturer in Wadley, Alabama which was shut down because of the bank failures. With active and pending work-orders, hundreds of workers were forced out of work. Instead of exclusively incentivizing international corporations to come here, imagine if Alabama also empowered workers such as those in Wadley to invest and collectively buy-out plants like Plantation Patterns. Let’s provide a framework for these potential entrepreneurs, our own people. Here is just another report from Farberware where this actually occurred.

As shown in this article, this ownership model is powerful and proven.

There are two things in which I believe strongly: that business is at the root of our economic challenges and that business is at the heart of the solution to those challenges. I don’t know whether that makes me a pessimist or an optimist–but I like to think it makes me an ideals-driven pragmatist.

That’s why I’m excited about a new way of doing business that’s not just good in theory, but has proven itself to be a workable solution in reality. It’s happening right now, right here in the United States. Business is realizing the power of placing ownership in employee hands. Instead of fixing a broken system, a few innovative communities are creating a whole new system altogether, one that‘s profitable, sustainable, people-focused, creates good jobs, and rebuilds dying communities. Say hello to Evergreen Cooperatives, the economic model of our future: the worker-owned business built upon the predictable revenue flow of place-based anchor institutions.

These models from Cleveland draw their inspiration from one of the most successful corporations in the world.

Many aspects of the Evergreen Cooperatives are modeled on the Mondragon Cooperatives, created by an activist Catholic priest in 1956 with the goal of lifting the Basque region of Spain out of the poverty it experienced in the aftermath of the Spanish Civil War. Today, Mondragon is a network of more than 120 worker-owned cooperatives generating more than $20 billion in annual revenue and employing 100,000 workers, making it Spain’s fourth largest industrial and seventh largest financial group.

Mondragon has a very unique structure which gives its wrokers a unique direct ownership interest in the company, as described here.

The basic building blocks of the MCC have been its industrial co-operatives. The industrial co-operatives are owned and operated by their workers. The workers share equally in the profits – and, on occasion, losses – of the co-operatives, and have an equal say in their governance. That they are able to do so is due to the unique structures and systems of governance and financial management which the Mondragón co-operatives have developed. In the case of governance, the workers in a co-operative have their say in the first instance through its General Assembly, where the performance of the co-operative is discussed and its policies determined. The workers also elect a Governing Council, which conducts the affairs of the co-operative between Assembly meetings, and an Audit Committee – referred to by some as the “Watchdog Committee” – which monitors the co-operative’s financial operations and its compliance with its formally established policies and procedures. Only members of the co-operative – all of them workers – are eligible to stand, and voting is on a one member/ one vote basis.

Our people will need to begin to think like owners instead of just workers which means taking responsibilities for losses,  belt tightening in lean times, but also lapping up the “gravy” during prosperous times.

The Mondragon pay scheme is quite unique as well; it avoids the problems of excessive executive compensation have plagued the US. A Mondragon bank or credit union would never have an executive earning 844 to 1 more than the low-wage worker as JP Morgan.

The earnings of a Mondragón co-operative are the property of its members. In place of wages, members are paid monthly advances – referred to as anticipos – against the income their co-operative expects to receive. Two further advances required by Spanish custom are made available at Christmas and for the summer holiday period. The co-operatives observe a “principle of external solidarity”, under which no advance should exceed by more than a narrow margin the wages paid for comparable work by nearby private sector businesses. The level of each member’s advance is determined in the first instance by a labour value rating which the Social Council of the co-operative assigns to the job. Overall, incomes are kept as equal as possible. The highest advances a co-operative pays its members cannot exceed the lowest by more than eight to one. By 1990, members had had an estimated increase in their purchasing power since 1956 of around 250%.

Additionally, the Mondragon model truly builds wealth for its members:

A further share of the co-operative’s earnings is credited to the members as capital. The capital structure has been designed to produce the greatest possible consciousness on the part of the each member that he is a stake-holder in the co-operative. The identification is achieved initially by requiring as a condition of entry to the co-operative that each member should make a direct personal contribution to its capital. There is an entry fee which currently stands at about $US12,500. Payment can be made on the basis of a 25% initial contribution, followed by monthly instalments. The co-operative then establishes an individual capital account for the member, to which 70% of his initial contribution is credited. The capital accounts earn interest at an agreed rate, and are credited each year with – say – 40% of the co-operative’s surplus, apportioned among members on the basis of their salary grades and the hours worked. Members may draw on the interest accumulated in their accounts, or use the accounts as collateral for personal loans, but the principal cannot normally be touched until they resign or retire. Payouts from the capital accounts of members currently retiring in Mondragón – over and above their superannuation entitlements – are in some instances in excess of $US100,000.

Here is a video from the BBC from 1980 discussing its Mondragon’s history, model, and development

In Cleveland, in the heart of the Rust Belt, this model seems to be thriving according to Fast Magazine:

So how is this new system working? Recently, I had the opportunity to visit the first two Evergreen businesses that were launched in October 2009: the Evergreen Cooperative Laundry, a cutting-edge green business, and Ohio Cooperative Solar.

Ohio Cooperative Solar (OCS) was profitable in its first five months in operation; current annual revenue is projected to be $1.3 million. At the end of the fiscal year, a portion of profits will be allocated to each OCS employee owner’s capital account, furthering the idea of people-focused business.

The Green City Growers, a hydroponic greenhouse, expects to break ground on the construction of a four-acre greenhouse this summer, with its first crop ready for harvest in the spring of 2012. When fully operational, it will produce 5 million heads of lettuce and 300,000 pounds of herbs annually and employ between 30 to 40 workers year-round.

Listen to these accounts of the cooperative model during the recent recession:

From a standing start in 1956, the MCC has grown to the point where by mid-2008 it was the seventh largest business group in Spain. Annual sales increased between 2006 and 2007 by 12.4 per cent to some $US20 billion, and overall employment by 24 per cent, from 83,601 to 103,731. Exports accounted for 56.9 per cent of industrial co-operative sales, and were up in value by 8.6 per cent. Mondragón co-operatives now own or joint venture some 114 local and overseas subsidiaries.

Hard-hit by the economic meltdown as like other business the co-operatives now find themselves, their members are tightening their belts in a further exercise of the solidarity that has enabled them to weather previous major downturns, and achieve new heights. For example, in 2008 worker owners at the Fagor appliance co-operative elected to forego the additional four-week’s pay normally due to them over the Christmas period, and have subsequently cut their pay by eight per cent. As the MCC’s Human Resources Director, Mikel Zabala, points out, “We are private companies that work in the same market as everybody else. We are exposed to the same conditions as our competitors”.

The only way for Democrats in Alabama to recover from 2010 will be to develop and perfect a new generation of solutions and ideas for prospering Alabama which are consistent with the deepest convictions of our people. I think this can be one.