Federal Incentives The American Jobs Creation Act 2004 introduced a major incentive program.

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 recent developments 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 of that year, 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 required 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 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.

"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."

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.

In January 2008, it was suggested that State tax systems are failing to keep up with fundamental shifts in the US economy and are impeding states’ overall fiscal health, according to an analysis released by the Pew Charitable Trusts’ Center on the States.

Pew’s research, which appeared in the Growth and Taxes in Governing magazine’s January issue, details how some states are adapting elements of their tax structure to meet the changing economy, but also points out that some states are failing to adapt their tax systems to commerce in the internet-driven 21st century.

“State tax systems are the backbone of our national and local economies. But antiquated tax structures result in lost revenue, an environment that is inefficient and inhospitable to business, and inequitable taxes on some segments of the economy at the expense of others,” argued Susan Urahn, managing director of the Pew Center on the States. “This issue should be at the forefront of all policy makers’ minds. Well-designed tax systems can boost economic vitality.”

Noting that the US economy has changed dramatically in the past three decades, largely due to new technology and telecommunications, the report observed that the economy in many states has shifted from manufacturing jobs to services and professional jobs. These changes place greater pressure on states to diversify their tax base and encourage newer, more innovative industries to take up residence within their borders.

However, according to the analysis, while some states have taken steps to improve the way they tax citizens and corporations in an effort to encourage a broader and more equitable tax base and ensure stable revenue streams, many changes still need to be made.

“A successful tax structure — one that supports economic growth and meets states’ fiscal needs — has at least four key components: transparency of tax incentives, efficient tax collection, stable revenue streams, and localities that have a say in how their communities are taxed,” explained Richard Greene, co-author of Growth and Taxes.

Other approaches to updating state taxation highlighted in Pew’s research included:

• Combining reporting of corporate income by requiring parent companies and their subsidiaries to add profits together. This enables the state to tax the percentage of an out-of-state subsidiary’s profits that can be attributed to the corporation’s in-state operations. States that do not use combined reporting, such as Iowa, lose out on a sizable chunk of corporate taxes. What’s more, it gives multi-state firms that can take advantage of loopholes a leg up on smaller, local firms.
• Giving localities flexibility to control tax rates and invest revenues as they see fit without state earmarks, which can help encourage economic vitality at the local level. Missouri, Washington, New York, Pennsylvania and Alabama give local governments authority over funds generated from property, sales and income taxes while Massachusetts, Florida, Nevada and others keep localities dependent on one tax or stream of revenue.
• Providing full disclosure and transparency about business tax incentives, and requiring reporting on how corporations receiving tax breaks are fulfilling their obligations to the state.
• Reducing volatility in revenue streams, which can make it difficult for businesses to plan effectively for growth. This involves building a diversified portfolio of taxes, relying not just on a single tax on a single industry but instead using several taxes, such as an income tax, a sales tax and selective excise taxes. For instance, Arizona has less volatility than many other states because of its diversification, while Oregon has the seventh-most volatile state tax system because it relies on the individual income tax for about 67% of its revenue.
• Using technology to automate audits and collect individual and business taxes. Six states — Nevada, New Jersey, New York, Pennsylvania, Tennessee and Virginia — already have fully electronic systems that assign, track, complete, review and transmit audits.

“State tax structures have not kept up with changes in today’s economy. Pressure exists to maintain the status quo and some corporate interests lobby hard to protect tax breaks and incentives that work to their advantage,” concluded Urahn. “To thrive financially, states need to create a pro-business environment and generate stable revenue streams that support critical investments and fuel innovation.”

In July, 2009, Louisiana improved its film tax credit scheme. State Representative Cameron Henry and Senator Robert Adley worked together to raise the State of Lousiana's film tax credit from 25% to 30%, effective in Autumn 2009, to bring it in line with incentives in the State of Georgia. The legislation would grant movie producers a transferable 30% state tax credit on their expenses, such as catering, hotels, costumes, equipment, trucks and lighting. They get an additional tax break by hiring Louisiana workers.

An important aspect of the new legislation is that there is no sunset provision. The 30% tax credit is permanent, which should instill confidence in the movie industry. "Other states may increase their credits above 30% and that is why it is important that the State convince the ancillary businesses needed to make movies to set up shop in Louisiana," said Henry, "Georgia may have a 40% tax credit in the future, but we’ll have great sound stages and a solid work base on top of a 30% credit", Henry said. "There is so much needed to make a movie - like set designers, laundry services, people to fix the cameras, things you would never even think of. If we can create that permanent infrastructure, it will give us an advantage because everything they need will be right here."

In August, 2009, Missouri Governor Jay Nixon signed a bill that makes improvements to Missouri’s captive insurance laws by simplifying the process of moving offshore captive operations to Missouri. House Bill 577, an omnibus insurance bill, removes some financial restrictions and clarifies provisions on alien redomestication. It also aims to attract companies based outside Missouri to set up captive operations in the state.

"Because of our central location, Missouri is seen as an ideal spot for companies across the country to locate a captive operation," said John M. Huff, director of the Missouri Department of Insurance, Financial Institutions and Professional Registration (DIFP).

Among the provisions of the new law are:

• Specific allowance of alien redomestication, which makes the process as simple as redomestication of a US-based insurer.
• Allowance for reciprocal formations to accommodate the return of offshore not-for-profit groups.
• Removal of the requirement for mandatory investment in Missouri, to accommodate companies with existing banking relationships.
• Additional options for admittance of available credit as assets for Special Purpose Life Reinsurance Captives.
• Reduction of the number of resident incorporators for Special Purpose Life Reinsurance Captives from two to one.
• A portion of all captive premium tax to be allocated for the DIFP’s captive operations, helping to ensure the long-term viability of the DIFP’s program.

Huff said the new law is a direct response to the current economic climate, in which captives have had trouble finding credit.

Federal Incentives The American Jobs Creation Act 2004 introduced a major incentive program.