"Operating at Cost" -- or Democratic Control?

Take note of the recently announced campaign by the National Cooperative Business Association, promoting co-ops as "not for profit" and "operating at cost." In the Cooperative Business Journal, President & CEO Russ Notar presents this response to arguments that co-ops are unfairly escaping taxes on their earnings.

But I worry that this campaign conveys the wrong message. Here's Notar:

"The basic argument from our opponents Is that cooperatives have an unfair advantage because cooperative businesses don't pay taxes. They argue that Congress should "level the playing field" so that everyone will compete equally. Which means that cooperatives should pay taxes lust like other corporations. While we know our opponent's arguments are hogwash, their message is reaching members of Congress.

Congress is receptive to these arguments for many and varied reasons, and I won't try to address all of these in this discussion. However, I believe there is one fundamental reason for our opponents' success. For many years, cooperators have stated that cooperatives are businesses just like other businesses, except we distribute our profits differently. Over the years I have made this argument frequently. However, this message is being heard and received differently in this revenue-seeking environment in Congress. Because Members of Congress have heard for years from us that cooperatives make a profit on generated eamings, it is very logical when others argue that it is unfair that cooperatives don't pay taxes on those earnings. We know that cooperatives "operate at cost" and often return a large portion of those eamings back to the members.

The subject of cooperative taxation is very complicated, possibly too complex to discuss fully in this article. But it is a fact that some cooperatives are tax exempt, and that many others are taxed just once - that is on the eamings which cooperative members report on their income taxes. For-profit businesses in our country are taxed on the eamings which they generate. Stockholders, ... eam dividends on that stock, when declared, and pay taxes on those dividends.

I understand how important it is that cooperatives must have earnings orientation to compete in a global economy. But I also can report to you that by portraying cooperative as businesses that make a profit we are hurting our image on Capitol Hill and I might say we're undermining the "reason for being" for cooperatives....

America's cooperatives are member-owned, member-directed and member financed. We are not "for-profit" organizations'. we are organizations operating at cost, to benefit our members. Eamings generated from economies of scale, volume purchasing and good management are rebated back to the members, who, in turn, pay necessary taxes on that income. That's what cooperatives are all about."

One problem with this argument, as Notar acknowledges, is that most co-ops do need to make a profit. In most cases, they are not merely operating at cost. But such issues do not define our purpose. These operating methods, and even the basic mission of service to members, are just means to some larger end.

If there is no larger end, no greater purpose beyond cutting costs, then co-ops are just a form of private business. Indeed, that is what an important segment of co-op leadership appears to think. Under this view, retaining the tax break co-ops receive on earnings distributed to their members becomes the chief political goal. Unfortunately, it may also become harder to defend.

Let's agree that cooperatives should receive a tax break on earnings properly allocated to the members. In businesses democratically owned by the patrons and/or workers, in which each receives benefits in proportion to that member's contribution, and in which the return on invested capital is limited and is not the driving force, there is a strong argument that the corporation should not be taxed.

But we should not have argued in the past, nor should we now, that cooperatives "are businesses just like any other businesses." My view, as offered in recent columns, is that co-ops are a different form of ownership, that we are about controlling capital -- capital in the larger sense of resources. The purpose of co-ops is to democratize ownership of economic resources. Co-ops are social and business organizations different from investor-driven private industry; they make possible more democratic control. In a society riven by extreme and unjust divisions, co-ops are about redistribution of wealth and power to those who invest in and patronize the cooperative, and more broadly to their communities.

I'm sure I cannot fully apprehend the present political environment in the nation's capital. And I have little expectation that my arguments will be adopted there. But perhaps it is time to state more forthrightly that many of this country's problems stem from uncontrolled private capital. Talk of "leveling the playing field" is typical of notions that disguise the enormous ongoing upward transfer of wealth, in both the corporate economy and the tax system, from the mass of the population to those who are wealthier. Co-ops are a very important way in which consumers and workers and communities try to organize fair use of resources and defend themselves against abusive private businesses.

Beyond cooperative principles, what are my assumptions? Here is a recent useful summary, by Frank Lindenfeld:

• All humans are equally valuable and should be treated as ends, not means.
• All members of society are entitled to share in its wealth and to have access to adequate food, shelter, and other necessities.
• Income should be distributed equitably.
• Workers should have a say in the decisions that affect them.
• Worker and community ownership and control of businesses is desirable.
• Workers should share equitably in the profits they help create.
• Small economic units are preferable to larger ones.
• Communities should be self reliant, emphasizing local production for local and regional consumption.
• Instead of maximizing profits, economic organizations should balance profits with providing high-quality goods and services, meeting the workers' needs for job security, income, and personal growth, and sustaining the natural environment.
• Economic organization should be based on mutual aid and cooperation; people should care for and help one another, and work together for common benefit.
• "Normal" work weeks should be as short as possible to afford all of us more leisure and to spread the available work.
• Unpaid, voluntary and caring activities are as valuable as paid jobs.

[See the next issue of CG, #73 Nov.-Dec. 1997, for followup letters from readers.]