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 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.

"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.

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