Intel is a rarity--a high-tech company based in the United States that still carries out a substantial part of its production work in this country. It spends billions of dollars on semiconductor fabrication plants that each employ hundreds of workers. As such, the company is highly sought by state and local officials. Intel, in turn, uses its economic rock star status to command tax breaks and other subsidy deals of extraordinary size.

This practice goes back more than two decades. In 1980 the company announced that it was opening a plant in the Rio Rancho suburb of Albuquerque, New Mexico that would get tax breaks through the use of $30 million in industrial revenue bonds (IRBs). This would be the first in a series of progressively larger IRB deals for Intel in New Mexico. IRBs typically are used as a form of low-cost financing. When bonds meet certain federal requirements, they are deemed tax-exempt, which allows the issuer to offer a lower-interest rate, thus saving on borrowing costs.

Intel and New Mexico officials, however, have turned the bonds into an unusual way of allowing the company to avoid taxes. What happens is that the deed to the plant and its equipment is put in the hands of a public entity, which leases the facility to Intel. The entity issues the bonds--which are not exempt from federal taxes--and they are all immediately purchased by Intel. The proceeds from the bond issue pay for the construction of the plant, and Intel, not the state, is responsible for repaying the bonds (to itself). The arrangement is an elaborate ploy by which Intel lends itself money while avoiding taxes relating to the plant, which is considered to be publicly owned and thus exempt from property taxes as well as a 6 percent tax on the purchase of equipment for the plant.

In 1993 the company set off a bidding war among half a dozen states when it announced plans for the largest plant expansion in the history of the semiconductor industry, one that involved the hiring of up to 1,000 new workers and investment of $1 billion. In the end, it chose Rio Rancho again, thanks to the offer of a new $2 billion IRB deal, investment credits and training funds. The deal was strongly criticized by community groups such as the Southwest Organizing Project, which also raised concerns about the likely environmental impact of the plant and the strain on public services. There was controversy about the exact size of the tax breaks being given to Intel. The official estimate for a five-year period was $114 million, while SWOP estimated $250 million and other observers put the value somewhere in between.

By 1995 Intel got approval for a new IRB bond issue worth $8 billion, the largest in U.S. history to that point. The larger the bond issue, the more that Sandoval County was losing in tax revenue on the equipment being installed by the company. To allay criticism, Intel agreed to build a $30 million high school for Rio Rancho and to hire 60 percent of its new employees from the local area. Still, in November 1998 the Rio Rancho situation was highlighted in a much-discussed Time magazine story on "corporate welfare."

Intel weathered that storm and went on to negotiate a massive $16 billion IRB deal with Sandoval County in 2004. Under the deal, which was not tied to the construction of a new facility and thus wouldn't necessarily create many new jobs, the company agreed to pay the county up to $95 million over the next 15 years in payments in lieu of taxes. Neither the company nor public officials would estimate what the net tax savings to the company would be.

Arizona
In 1994 Intel received a lucrative package of subsidies from Arizona, where it decided to build a $1.3 billion fabrication plant in the town of Chandler, the site of an existing smaller Intel facility. Intel went with Chandler only after getting the state legislature to approve various tax exemptions and tax credits. The company also received foreign trade zone status from the U.S. Department of Commerce, which triggered additional tax breaks.

A decade later Intel asked Chandler to help it finance a $2 billion expansion of the plant by issuing $250 million in Industrial Development Authority tax-exempt bonds, which would be repaid by the company.

When Intel planned another fabrication plant upgrade, it supposedly considered several states, but the company's main focus was on pressuring Arizona to agree to a change in its corporate tax formula so that it is based to a greater extent on a company's sales in the state (which in Intel's case is a small portion of its total revenues) and to a lesser extent on in-state payroll and property. The state bowed to Intel's wishes, and the company promptly announced that the project would be located in Chandler.

Oregon
Intel built a fabrication plant in Washington County, Oregon in 1996 and proceeded to seek a series of tax breaks under the auspices of the state's Strategic Investment Program, which was reportedly drafted with the help of the company. In 1999 Intel won approval for $200 million in personal property (equipment) tax abatements in connection with projected future investments of $12.5 billion. In 2005 county and city officials in Oregon agreed to extend Intel's exemption on $25 billion in new equipment for an additional 15 years. The deal will save the company an estimated $579 million.

As in Arizona, Intel has also used its enormous influence in the state to press for changes in corporate tax formulas to aid it and other large businesses. Intel was one of the companies that successfully pressured Oregon to adopt a (phased-in) single sales factor formula, and more recently it pushed for an extension of the Strategic Investment program.

Intel has been sending a message to states around the country that if they want to be considered as a site for one of the company's huge facilities, they have to change their tax code in the manner done by Arizona and Oregon. Intel is openly playing states against one another, thereby seeking to reduce its state tax burden to virtually nothing.

Sources

Paul Davenport, "States Eye Tax Breaks As Lure for Intel," Associated Press, March 13, 2005.

Bob Keefe, "States and Cities Dangling Tax Breaks Before Intel," Cox News Service, May 26, 2005.

Michelle Levander, "Intel Sparks a Backlash; Critics in New Mexico Say the State Gave Up Too Much to Win Chip Plant," San Jose Mercury News, May 8, 1994.

Southwest Organizing Project, Intel Inside New Mexico: A Case Study of Environmental and Economic Injustice, 1995.

Daniel Sorid, "States Race to Cut Taxes to Attract Intel," eWeek.com (reprinted from Reuters), March 6, 2005.

Ron Starner, "Intel Outside," Site Selection, May 2001.

Jim Watts, "Intel Wants N.M. County to Issue Up to $16B of Unique Bonds for Expansion," Bond Buyer, August 18, 2004.

Jim Watts, "New Mexico County Oks $16B of Self-Funded IRBs by Intel," Bond Buyer, September 20, 2004.

Andrew Webb, "Bonds Have Funded Intel's Local Success," Albuquerque Journal, August 23, 2004.

Andrew Webb, "Chip Maker--Once Again Seeking Large Bond Issue--has Fueled Rio Rancho's Explosive Growth," Albuquerque Journal, August 23, 2004.