State
Incentives
At
State level there is intense competition
for inward investment, whether from other
states or from abroad, and almost all
states have extensive programs of incentives
under some or all of the following headings:
Industrial
property tax exemption - Exempts a
manufacturing establishment from state,
parish, and local property taxes for a
period of up to ten years.
Enterprise
zone - Provides a tax credit for each
net new job created in specially designated
areas. Also may provide for a rebate of
state sales/use taxes on building materials
and operating equipment. Local sales/use
taxes may also be rebated. Credits can
be used to satisfy state corporate income
and franchise tax obligations.
Restoration
tax abatement - Encourages restoration
of buildings in special districts by abating
Ad Valorem Taxes on improvements to the
structure for up to ten years
Inventory
tax credit - Provides tax credits
against state corporate income and franchise
tax obligations for the full amount of
inventory taxes paid. When credits are
in excess of tax obligations, a cash refund
may be made.
Freeport
law - Cargoes in transit are exempt
from taxation as long as they are kept
intact within their smallest original
shipping container. Most manufacturers
can bring raw materials into a state without
paying taxes on them until they are placed
in the manufacturing process.
Foreign
trade zones - Foreign Trade Zones
make it possible to import materials and
components into the U.S. without paying
duties until they enter the US market.
Goods shipped out of the country from
FTZs are duty-free.
Workforce
development and training - Develops
and provides customized pre-employment
and workforce upgrade training to existing
and prospective businesses.
Construction
or improvement of facilities - Gives
an investment tax credit of 10 percent
or more of the cost of tangible assets,
including buildings and structural components
of buildings located within a designated
economic development zone.
Notable
developments in 2005 in the field of State
incentives included the following:
In January, 2005, a US federal appeals
court endorsed a ruling that the state
of Ohio violated the US Constitution by
giving DaimlerChrysler AG a production
tax break, a decision which observers
said could have implications for business
nationally. The case concerns the state’s
attempt to prevent DaimlerChrysler from
shutting a factory in 1998 by offering
the auto maker a $280 million tax break
in exchange for a $1.2 billion plan to
expand the complex.
However,
the appeal court ruled that the tax break,
which gives the company a tax credit equal
to 13.5% of the company's spending on
certain qualified investments, including
machinery, violated the US Constitution's
interstate commerce clause. The tax break
was initially challenged unsuccessfully
in a lower court by a group led by consumer
advocate Ralph Nader, who labelled the
incentive a form of "corporate welfare."
Then
in September, a three-judge panel of the
appeals court ruled that the tax credit
"discriminates against interstate commerce
by coercing businesses already subject
to the Ohio franchise tax to expand locally
rather than out-of-state," according to
the Wall Street Journal. The US business
daily went on to reveal that the full
panel last week refused to reconsider
the earlier appeals court decision.
Business
groups and state governments warned that
the judgement could have implications
beyond Ohio’s borders to the states under
the jurisdiction of the Sixth Circuit
Court of Appeal in Cincinatti, including
Michigan, Kentucky and Tennessee, and
ultimately nationally.
DaimlerChrysler’s
director of corporate communications Michael
Aberlich was reported by Dow Jones to
be “disappointed and somewhat bewildered"
by the ruling, and a spokesman for the
Ohio Department of Development announced
that the state will contest the decision
in the Supreme Court.
In April, 2005, it was announced that
chip-making giant Intel had reached an
agreement with the state of Oregon that
would grant the firm tax incentives on
new investment in the state valued up
to an estimated $25 billion over the next
fifteen years. "This proposal makes good
policy sense and good economic sense,"
stated Tom Brian, chair of the Washington
County Board of Commissioners, at a joint
presentation with Intel Public Affairs
Director Diana Daggett and local officials.
"On
the policy side, we could extend our successful
1999 agreement - and the public services
it supports - a quarter-century into the
future. On the economic side, we could
keep tens of thousands of jobs in Washington
County and in Oregon at a time when our
state is struggling to retain jobs, let
alone create new jobs," he added.
The
proposed 2005 Strategic Investment Program
(SIP) agreement requires Intel to pay
an estimated $115.3 million in property
taxes and fees over a 15-year period beginning
as soon as 2008 or as late as 2012. The
amount is nearly twice that required by
the 1993 Oregon law that created the Strategic
Investment Program. In 1999, Washington
County negotiated a SIP agreement with
Intel that set the stage for Intel to
invest up to $12.5 billion over 15 years
beginning in 2000. In addition to the
tax payments required by the 1993 state
law, the county required Intel to make
guaranteed payments of about $2 million
per year for 15 years, even if no investment
were made. The county also required Intel
to pay the equivalent of full taxes on
all land and buildings associated with
the SIP project. Finally, the 1999 agreement
allowed for tax savings to Intel for investment
in machinery and equipment used for semiconductor
manufacturing. This machinery and equipment
costs billions of dollars to create and
can become obsolete within two-to-three
years.
Under
the proposed 2005 agreement, Intel could
invest up to $25 billion in Oregon over
a 15-year period beginning as soon as
2008 or as late as 2012. Beginning in
the 2015-16 tax year, the county would
then collect guaranteed annual payments
of $2.9 million to $3.6 million toward
a total of $28.7 million. Once investment
were to begin under the 2005 SIP proposal,
these guaranteed annual payments would
be required over the life of the agreement,
even if no investment occurred in subsequent
years. As with the 1999 agreement, Intel
would be required to pay fees equal to
full taxes on all land and buildings associated
with the 2005 SIP. "As
helpful as this proposal would be for
stabilizing the long-term investment climate
for Intel in Oregon, Intel would still
be paying the equivalent of twice as much
per employee as the property taxes paid
per employee by the average Washington
County business," observed Brian, adding:
"Intel’s
payments per square foot would also continue
to be among the highest in the county."
In
May, 2005, Senator George Voinovich (R-OH),
Representative Pat Tiberi (R-OH), Senator
Debbie Stabenow (D-MI), and Representative
Ben Chandler (D-KY) introduced a bill
to protect tax incentives used by states
to encourage job creation and economic
development. The bill has bi-partisan
support and is co-sponsored by all the
Senators in the Sixth Circuit: Sen. Debbie
Stabenow (D-MI), Sen. Mike DeWine (R-OH),
Sen. Carl Levin (D-MI), Sen. Bill Frist
(R-TN), Sen. Lamar Alexander (R-TN), Sen.
Mitch McConnell (R-KY), and Sen. Jim Bunning
(R-KY).
The
bill was also supported by Ohio Governor
Bob Taft, Tennessee Governor Phil Bredesen,
the National Governors Association, the
National Association of Counties, the
US Conference of Mayors, which is led
by Akron Mayor Don Plusquellic, the National
League of Cities and the National Association
of Manufacturers. The Teamsters and broad-based
business coalitions are also supporting
the bill.
The
bill authorized states to provide tax
incentives for economic development purposes.
Such tax credits are widely used by states
to encourage companies to expand and relocate
in their borders and are a critical economic
development tool, especially during difficult
economic times.
The
bill sought to override the 2004 ruling
by the 6th Circuit Court of Appeals in
Cuno v. DaimlerChrysler that declared
Ohio's investment tax credit program unconstitutional
because it was an attempt by a state to
interfere with interstate commerce. The
Cuno decision threatens to severely restrict
the ability of states to design their
tax codes to promote economic development.
This
bill would override the Cuno case by authorizing
states to grant tax incentives that otherwise
would impermissibly interfere with interstate
commerce. Tax incentives not authorized
by the bill, however, would not automatically
be invalid, but instead would be subject
to the traditional judicial review.
The
program at the heart of the Cuno case,
the Ohio Machinery and Equipment Investment
Tax Credit program, was used successfully
by Voinovich while he was governor to
convince DaimlerChrysler to build its
new Jeep plant in Toledo, which plays
a key role in ensuring the region's economic
vitality.
Since the creation of Ohio's investment
tax credit program in 1995, businesses have
been eligible to claim a total of $2 billion
in credits toward $34 billion in new equipment
investments. Overall in Ohio, the manufacturing
sector accounts for the second highest weekly
earnings of any economic sector and supports
local communities and schools with more
than $1 billion in corporate franchise and
personal property taxes. "States
are the laboratories of democracy and
an innovation they have developed in recent
years to help create jobs and prosperity
are programs that allow them to encourage
new growth through tax incentives for
training, job creation, and investment
in new plants and equipment," stated Voinovich.
He
continued: "This was critical to our success
in Ohio and in being number one in new
plant construction and expansion. States
should be allowed to use these growth
tools in their borders, and yes, states
should be allowed to compete for new businesses
and jobs.
"The
winners will be working men and women
who are looking for a job. My bill guarantees
that we can keep using these tools to
help grow our economy and put people to
work," he added.
Meanwhile,
Representative Tiberi noted that: "While
this issue can sound somewhat complicated,
it boils down to one word and one word
only-- jobs. We want to ensure that Ohio
has the ability to compete when it comes
to attracting new jobs or retaining the
jobs we have."
In
September, the US Supreme Court announced
that it would review the 2004 Cuno
appeal court ruling.
Welcoming
the Supreme Court's decision to review
the case, lawyer for the plaintiffs, Terry
Lodge suggested that: "A clear statement
of the unconstitutionality of discriminatory
state tax incentives will free all the
states from the necessity of engaging
in an escalating competition over incentives
that deprives them of needed revenues,
while gaining a meaningful competitive
advantage for none."
The
Cuno legislation was still before the
House in mid-2006.
In
May 2006, the US Supreme Court rejected
the legal bid by the taxpayer advocacy
group to have the $280 million tax break
offered to carmaker DaimlerChrysler by
Ohio overturned.
Sending
the matter back to Ohio's state courts,
the unanimous Supreme Court panel ducked
the constitutionality issue by arguing
that the taxpayers were not directly affected
by the tax incentive scheme, and that
they did not therefore have the legal
standing to bring the matter before the
federal courts.
In
May 2007, it emerged that with a recently-approved
package of tax breaks, Alabama had beaten
competition from other US states to secure
a $3.7 billion investment by German steelmaker
ThyssenKrupp - the largest foreign investment
ever undertaken by the company.
After
studying 67 potential sites in 20 states,
and narrowing down the search to three
states - Alabama, Arkansas and Louisiana
- ThyssenKrupp announced in May 2007 that
it would build its new plant at a site
about 25 miles north of the Alabama port
of Mobile. The firm is expected to benefit
from about $400 million worth of fiscal
incentives.
According
to the steelmaker, other decisive factors
in favor of Alabama included logistical
considerations of the company’s
supply chain from Brazil; operating costs
such as electricity and labor; and site
specific capital expenditures.
The
new plant complex, which is scheduled
to begin operations in 2010, will be one
of the largest private industrial development
projects in the United States over the
next decade. Approximately 29,000 jobs
will be generated during the construction
phase. When it is fully operational, the
plant will employ 2,700 people. Over a
20-year period, the facility is also expected
to yield tens of thousands of indirect
jobs. Construction was expected to begin
by the end of 2007.
The
new facility will process carbon steel
and stainless steel for high-value applications
by manufacturers in the United States
and throughout North America. The plant
will serve industries including automotive,
construction, electrical and utility,
in addition to serving manufacturers of
appliances, precision machinery and engineered
products.
However,
one-off fiscal incentive packages such
as those offered by Alabama have been
the subject of much controversy in recent
years with critics of these schemes arguing
that they distort competition within the
United States and disproportionately shift
the tax burden to individuals and small
business taxpayers.
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