The underground economy is never going away. There will always be those – particularly in the construction industry – who dodge taxes and safety regulations by bending rules or working strictly for cash.
But you’d think that on government projects, the rules would apply. Sadly for unsuspecting taxpayers, a yearlong McClatchy Newspapers investigation has uncovered massive fraud in the 2009 federal stimulus project intended to rebuild America and jump-start the economy.
A review of public records in 28 states shows that unscrupulous companies robbed state and federal treasuries of billions of dollars each year. Their deceit was accomplished by one of the oldest tricks in the book: listing employees as independent contractors and issuing them “1099” tax forms.
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Worse, as Mandy Locke and Franco Ordonez of McClatchy’s Washington Bureau reported in the multipart series “Contract to Cheat,” federal regulators, “while cracking down on the practice in private industry, let it happen in stimulus projects in the rush to pump money into the economy at a time of crisis.”
McClatchy’s reporters found the problem was widespread in the South, where there is abundant immigrant labor and anti-union sentiment. In Texas, the state and federal governments lose an estimated $1.2 billion a year because of misclassification. The amount lost in North Carolina is believed to be $460 million annually; in Florida $400 million. All this money – which is owed fair and square – could be used for the public good across the nation.
Companies that play by the rules lose, too, when government regulators either look the other way or fail to uncover what’s happening under their noses. By failing to pay taxes, health benefits and prevailing wages on government projects, cheaters underbid honest competitors by up to 25 percent and still turn a profit.
And there are the workers. Dale Whitten, a commercial painter in Holt, Mo., earned $20 an hour for his work on an affordable-housing project in Kansas City. He should have gotten $41.75 plus benefits.
Alfredo Barreda of San Fernando is part of a U.S. Labor Department complaint that alleges his boss forced him to return part of his paycheck for working on military bases. Barreda said he wound up with $17 to $20 an hour instead of the prevailing wage. Barreda’s experience is all too common in our state. A report commissioned by the United Brotherhood of Carpenters estimates some 39,800 construction workers in California were wrongly classified as independent contractors in 2011.
“It’s a burden obviously to all the governments who are not getting the tax revenue they should get and, of course, legitimate employers (who) are losing a lot of good business,” said Bruce Wick, risk management director for the California Professional Association of Specialty Contractors, which represents specialty trade contractors and suppliers. “And it’s unfair to workers who are not protected by workers’ compensation laws, labor laws and (Cal/OSHA) ... and are driven underground because they’re afraid to file taxes.”
The McClatchy investigation, which included reporting by the independent nonprofit news outlet ProPublica, found that Illinois and New York are national leaders in cracking down on cheaters. Both states have tough laws backed by task forces specializing in sniffing the trail of construction crooks.
If you are outraged, call your state or federal representative and say it’s time to start looking out for taxpayers. Dogged reporting by McClatchy Newspapers – the kind that people tell us they want more of – has uncovered a huge problem that needs fixing.