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The Truth in Settlements Act: A Good First Step toward Ending the Tax Deduction for Corporate Fines and Settlements

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(This post originally appeared on The Fine Print, the blog of the Center for Effective Government)
By Scott Klinger | July 29, 2014

*Note: The Truth in Settlements Act was reported out of the Homeland Security and Government Affairs Committee on Wednesday.

When corporations commit fraud or have an accident that threatens human health or damages the environment, they pay a fine or settlement to resolve legal claims. These costs can run into the billions of dollars. In general, out-of-court settlements paid to a government for punitive damages (those designed to punish corporations for lax business practices that cause public harm) cannot be deducted from a firm’s taxes.  However, if settlements are paid to private parties or to a governmental agency as “compensation” to offset costs incurred in clean-up or during an investigation and prosecution, these fees may be written off as tax deductions. This essentially reduces costs of the settlement by one third.

In many cases, the terms of the settlement are kept secret. Recently, a few government agencies issued clear public statements on tax deductibility when announcing settlements. Upon announcing a $4 billion settlement with BP resolving criminal charges that the oil giant lied about the rate of oil leaking from its Deepwater Horizon drilling platform, a Department of Justice spokesman, when asked whether the settlement was deductible, replied, “They are not. The Attorney General was very clear that nothing in the criminal settlement could be tax deductible…” But not all agencies are as clear as this when they announce fines or settlements for corporate incidents and misdeeds.

A new bipartisan bill, The Truth in Settlements Act (S. 1898), will be marked up on Wednesday by the Senate Homeland Security and Governmental Affairs Committee. The bill, sponsored by Sens. Elizabeth Warren (D-MA) and Tom Coburn (R-OK), would require federal agencies to provide certain information about all fines and settlements over $1 million.  The agencies would have to disclose information on the tax benefits associated with the settlement. If settlements are deemed confidential, the agency would be required to explain why. The legislation also requires public corporations to disclose in their SEC filings any tax deductions they receive from fines or settlements with government agencies.

The disclosures required by the Truth in Settlements Act would allow citizens and taxpayers to understand the real costs of the fines and penalties corporations pay for misbehaving and to judge for themselves whether they think the punishment fits the misdeed.

We need to believe in a regulatory system that works, and to do that, we need to believe that bad actors will be held appropriately accountable. The Truth in Settlements Act is a good first step toward ensuring that fines and penalties truly deter bad corporate behavior. When corporations break the law or violate regulations, hurting the public or damaging the environment, the American people pay a price. Shareholders, not taxpayers, should pick up the full tab for damage done by corporations and for penalties imposed for illegal behavior.

We urge the Homeland Security and Governmental Affairs Committee to pass the Truth in Settlements Act and hope the entire Senate adopts this important reform before this Congress ends in December.

For more information on this issue, we recommend: Subsidizing Bad Business: How Corporate Legal Settlements for Harming the Public Become Lucrative Tax Write Offs, with Recommendations for Reform, published by the U.S. PIRG Education Fund in January 2014.

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Four Years After Dodd-Frank: A Lot to Celebrate, A Lot More Work to Be Done

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Six years ago in September, following a decade of under-regulation, reckless Wall Street practices crashed our economy. Two years later, in July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Since then, the process of turning the financial reform legislation into implementable law has frequently been stalled. Armies of well-financed lobbyists representing banks and industry interests have labored to water down and delay the rules, but still, consumers are reaping huge benefits from the legislation. These accomplishments are exemplary of the way our regulatory system should work to hold corporations accountable and protect the public from harm, but they are only the first steps on a longer journey to financial security and regulatory transparency.

Without a doubt, the Consumer Financial Protection Bureau (CFPB), first envisioned by then-Professor Elizabeth Warren, has had an incredible impact on the ability of consumers to make informed decisions about financial goods and services. Since beginning to accept consumer complaints in July 2011, the CFPB has now reviewed more than 395,000 complaints on products ranging from credit cards to mortgages to student loans. This public record of complaints, along with educational tools and programs, has greatly reduced the types of predatory lending and misleading advertising that sent many consumers into debt leading up to the 2008 financial crisis.

However, powerful industry interests have taken advantage of the fact that the other regulators tasked with implementing the law, the Securities Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), must rely on congressional appropriations for their funding. By lobbying Congress to starve the agencies of funds and resources, Wall Street representatives have succeeded in delaying many of the rules mandated by Dodd-Frank. To date, 208 of the 398 rules associated with the initial legislation have been finalized, and of the 190 rules waiting to be implemented, 96 requirements have yet to even be proposed.

These rules are critical for protecting the country from a similar financial crisis. Here are the top three that consumers should know and care about:

1. Under Dodd-Frank, the SEC has the authority to prevent professional brokers from misleading consumers. As it stands today, brokers acting as financial advisers can make bad investment recommendations to unsuspecting consumers for their own profit. This rule has been stalled repeatedly by fierce opposition from industry representatives who benefit from these exploitive practices.

2. Another important provision under Dodd-Frank addresses executive compensation. Many of the highest-paid CEOs in the finance industry needed to be bailed out after the 2008 financial crash. The SEC has the authority to require companies to report their CEOs’ compensation, as well as the median compensation of all other employees, allowing the public to compare these values and make judgments about the type of company they are supporting through their investment. This is necessary to bring more attention and transparency to issues like income inequality and social mobility that consumers have a right to know about.

3. Although Dodd-Frank allows the SEC to more closely regulate credit ratings agencies, little has changed since the 2008 financial crash. These are the very agencies that gave toxic mortgage securities triple-A ratings, fueling the housing bubble and leaving the economy in disarray after the crash. The SEC can and should prevent the ratings agencies from getting paid by the very companies whose securities they are assessing.

Financial reform garnered widespread attention from millions of Americans of all backgrounds and political identities – particularly those who lost their jobs and homes because of Wall Street greed. It is this unprecedented support from the public that allowed congressional leaders and champions of reform to fight hard to pass the Dodd-Frank legislation. We must continue that fight to bring security to our markets by promoting greater transparency, holding offenders of the law accountable, and pushing regulators to fully implement Dodd-Frank. This is just one example of the way regulation of all kinds ensures that families who work hard and play by the rules can build a better future for themselves and their children.

Hide No Harm Act: We Need Corporate Accountability

A new piece of legislation introduced this week by Sen. Richard Blumenthal (D-CT) would ensure that corporate executives who knowingly market life-threatening products or continue unsafe business practices are held criminally responsible when people die or are injured.

Under the Hide No Harm Act, key corporate managers will be required by law to report serious dangers to relevant government agencies, employees and affected members of the public. No longer will corporate executives be able to walk away from their crimes with a light fine. When individuals knowingly allow harmful products and practices to endanger the lives of workers and consumers, the penalties will be appropriate and proportionate: heavy fines and jail time.

This bill comes in the devastating wake of the many preventable deaths and injuries caused by General Motors’ vehicle ignition defects. Although GM officials knew about the defects for as long as 13 years before issuing a recall on their cars, no one is going to jail. Unfortunately, this is just one recent example in a long list of cases of corporate malfeasance leading to unnecessary death:

  • Toyota intentionally concealed information from the public about defects in their automobiles that caused them to accelerate even as drivers were trying to slow them down, leading to at least five deaths and resulting in no criminal penalties for individual Toyota executives.
  • Guidant, a company that manufacturers cardiovascular medical products, allowed 37,000 malfunctioning heart defibrillators to be sold, even after executives learned of deaths caused by the short-circuiting of their devices.
  • Second Chance Body Armor, a bulletproof vest manufacturer, sold defective vests to hundreds of thousands of law enforcement and military personnel, fully aware that the Zylon material used in the product was degrading and therefore penetrable, meaning bullets could pass through them.

These examples demonstrate the need for legislation that sets serious consequences for corporate executives who place the value of company profits over human lives. The American public and the families of these victims deserve justice. “No money will ever bring my wife’s daughter back,” said Ken Rimer, the stepfather of a young woman who was killed in a car crash after her air bags failed to deploy due to the ignition switch failure. But “unless there’s a consequence for them doing something wrong, what’s going to stop them from doing something wrong again?”

Six Month Anniversary of West, Texas Fertilizer Plant Explosion

Today is the 6 month anniversary of the West, Texas fertilizer plant explosion, a disaster that destroyed a community, claimed 15 lives, and injured over 160 others. The West Fertilizer Company supplied chemicals to farmers since it was founded in 1962, and was last inspected by the Occupational Health and Safety Administration in 1985.

West Texas

In the aftermath of the explosion, the operator of the fertilizer plant was cited for 24 safety violations and charged $118,300 in penalties. Safety violations included exposing workers to explosion hazards and chemical burns, unsafe handling and storage of chemicals, failing to have an emergency response plan and not having an appropriate number of fire extinguishers.

The US Chemical Safety Board (CSB) reported that regulation of the dangerous chemicals used in the industry fall under shoddy standards that are dated and far weaker than standards in other countries. However, Texas, which has the country’s highest number of workplace fatalities, is still wary of regulations.

During the government shutdown 90% of CSB employees were furloughed, causing a delay in the investigation of the West, Texas disaster.

Advocates Oppose Poultry Modernization Rule: Food and Worker Safety Experts Unfurl 500,000 Signatures Outside White House Opposing a New USDA Regulation

On Thursday, September 26th, a coalition of food and worker safety advocates and allies rolled out the names of over 500,000 people opposing a rollback to the USDA poultry processing system that could increase food poisoning for American consumers and put workers at risk of serious harm.

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The press conference showcased a man in a chicken suit covered in “feces”, “bile”, “pus”, “salmonella”, and “campylobacter”. The groups involved, including Interfaith Worker Justice, Coalition for Sensible Safeguards, Center for Effective Government, Food and Water Watch, Government Accountability Project, AFGE, SumOfUs.org, and others rolled out papers with the names of 500,000 people who have signed action alerts, petitions or comments opposing this rule (like this one from retired poultry inspector Phyllis Mckively).   Advocates encouraged the White House to take the many concerns of these groups into considerations instead of moving forward with the change.

“Mounting opposition and media attention to loosening  blog4USDA inspection in meat processing is making more people conclude that the administration is more responsive to increasing industry profits than protecting consumers from contaminants,” said Tony Corbo, Senior Lobbyist at Food & Water Watch.

This industry-friendly regulation is bad for consumers and poultry workers. In fact USDA’s own evidence on the impacts of this rule change is seriously flawed. Up to 75% of USDA inspectors will be removed and replaced with factory employees, reducing federal oversight and increasing the danger of poultry contamination, chemical residue, and food poisoning bacteria. In addition, the rule change would place poultry factory workers at severely increased risk of injury and chemical exposure by increasing production speed by up to 25 percent.

To take action against this pro-industry, anti-consumer regulation, sign the petition to President Obama urging him to reverse the USDA’s horrible poultry regulations. VIEW THE PETITION HERE: http://action.sumofus.org/a/usda-chicken/?sub=pr

Obama Administration Issues Home Care Rule

Cross-posted from the Economic Policy Institute

The U.S. Department of Labor issued final regulations today that extend minimum wage and overtime protections under the Fair Labor Standards Act to about two million previously excluded home care workers—personal care assistants for the frail elderly and the disabled, home health aides, and other direct support paraprofessionals working in the homes of patients and clients needing personal help with needs ranging from changing the dressings on wounds and administering non-injectable medications to personal hygiene and ambulation. The home care workforce is growing fast as the population ages and more people are cared for in their homes, rather than in costlier institutional settings. These jobs need to be decent jobs that pay a living wage.

Although domestic workers, like nannies, chauffeurs and housekeepers, were first covered by the FLSA in 1974, most home care aides have been excluded from minimum wage and overtime protections by the Act’s vague “companionship” exemption, which was never meant to cover people providing services for pay, while in the employ of a third party, rather than in a direct relationship with the patient or elderly client. An agency—and there are very large agencies, some employing tens of thousands of home care workers—could therefore ignore FLSA rules about paying for travel time when an aide moved between one client’s home and another’s, ignore the rules governing break time, and avoid paying time and a half for overtime when an aide worked more than 40 hours in a week. Some employers have even paid less than the miserably low federal minimum wage of $7.25 an hour.

Incomes for home care aides are so low that an estimated 40% receive public supports like food stamps even as they work as many hours as they can. The low pay for the critically important work these aides do has led to very high turnover, the loss of experienced workers, and ever-increasing demands for guestworkers from abroad to take these jobs. A far better course would be to raise wages and require that wages are paid for every hour of their work—to treat this workforce with the respect they deserve.

The Department of Labor’s Home Care final rule is a good start on this process of lifting the wages and improving the lives of this vitally important and fast-growing group of care-givers.

CSS Report: Public Pays Price as Eight Key Rules Held Up

It was just a year and a half ago – December 15, 2011 – that President Obama championed a key proposed rule from the the Department of Labor. The rule was going to fix a longstanding problem: companies employing home health care workers do not have to pay them minimum wage or an overtime wage (we’re not making this up). The labor department was finally proposing to change that. Here’s how the President put it in a White House ceremony that day:

As the homecare business has changed over the years, the law hasn’t changed to keep up. So even though workers like Pauline do everything from bathing to cooking, they’re still lumped in the same category as teenage babysitters when it comes to how much they make. That means employers are allowed to pay these workers less than minimum wage with no overtime. That’s right — you can wake up at 5:00 in the morning, care for somebody every minute of the day, take the late bus home at night, and still make less than the minimum wage. And this means that many homecare workers are forced to rely on things like food stamps just to make ends meet.

That’s just wrong. In this country, it’s unexcusable. I can tell you firsthand that these men and women, they work their tails off, and they don’t complain. They deserve to be treated fairly. They deserve to be paid fairly for a service that many older Americans couldn’t live without.

Fast forward to today: the rule President Obama championed has not actually been issued. The labor department sent a draft of its final rule to the White House’s Office of Information and Regulatory Affairs (OIRA) on January 15 of this year for review. And that’s where it stands today. The rule the president himself championed is being held up in his own White House.

The home care worker rule is just one of 8 stalled rules chronicled in a new Coalition for Sensible Safeguards (CSS) report, Down the Regulatory Rabbit Hole: How Corporate Influence, Judicial Review and a Lack of Transparency Delay Crucial Rules and Harm the Public. The report shows how a series of public protections drafted by federal agencies are stalled, in several cases beyond specific legal deadlines set by the U.S. Congress. And it shows how the failure to finalize rules harms the American people by compromising the safety of food, automobiles, workplaces and protections for investors.

The report argues that regulated industries have gained undue influence in the rulemaking process, working to slow or stop federal oversight at every step along the way.

The report’s recommendations for the Obama administration are succinct: The administration has the authority and ability to issue six of the eight rules discussed in this report and should do so promptly. Three of those rules have been delayed even beyond legal deadlines set by Congress.

The report also recommends changes Congress can make to help ensure that other public protections are less easily stalled, weakened or blocked, and that the rules would be more effective once implemented.

– Ben Somberg