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Eye on Subsidies |
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February 22, 2007 by Karla Walter and Allison Lack
Oodles for Google in North Carolina
In a previous Eye on Subsidies we noted that the Carolinas had found themselves in a bidding war for a $600 million Google Inc. server farm -- a facility with thousands of computers that help handle web traffic. North Carolina can now claim it has won this war, but at a cost that could reach $260 million. Local officials have yet to confirm the exact value of the deal, but recent reports suggest that tax abatements by the city of Lenoir and Caldwell County could reach $165 million over three decades. This is in addition to state tax breaks and grants that could reach $94 million. The Caldwell area economic development group acknowledged in a statement: "The number and scale of economic incentives for which Project 'Google' is eligible are virtually unprecedented in N.C." but added: "so are the potential long-term benefits." Who exactly will reap these benefits is unclear. With the city and county abating 100 percent of Google's business property taxes and 80 percent of its real-estate taxes for three decades, questions have been raised about the effects of the deal on other taxpayers. Lenoir City Council member Timothy J. Rohr, who voted against the incentives, was quoted in The Charlotte Observer as saying: "Everyone else in the community is going to have to take up the slack." Moreover, it is unclear how many local residents will be eligible for the 210 jobs Google expects to create since many of the positions will require advanced degrees, which only about 13 percent of county residents have. Also controversial is the secrecy Google required of officials while negotiating the deal -- demanding that lawmakers keep its name secret from the public, even from residents who were asked to sell their homes and properties for the project. The secrecy was maintained for months before even an estimate of the full costs of the incentive package were disclosed. "In some ways it's even more unconscionable than the Dell deal," said Robert Orr of the North Carolina Center for Constitutional Law, which is currently suing to repeal a state and local deal for Dell in Winston-Salem valued at $280 million. Thomson Corp. cashing in on dubious bidding war
Thomson Corp., publisher of law text books and the legal database Westlaw, recently announced it will expand its workforce in Eagan, Minnesota by a projected 2,000 workers. For this $100 million expansion, Thomson (which currently employs 6,800 on the site) could receive up to $10.2 million in state and local subsidies. Yet the existence of any real competition for the expansion site has been called into question. While officials originally announced that the subsidy was reached after a fierce three-way competition that also involved Carrollton, Texas and Mason, Ohio, Thomson representative John Shaughnessy suggested to the St. Paul Pioneer Press that the other communities were never really in the running for the expansion site. According to Shaughnessy, Mason was not an option because Thomson is selling its Thomson Learning division located just outside of the Ohio community and Shaughnessy said Thomson never even contacted city officials in Carrollton, Texas. Eagan is by far the largest facility owned by Thomson, a company that in 2005 produced $8.4 billion in annual revenue. Shaughnessy told the Minneapolis Star Tribune, "...it became pretty clear early on that the Eagan campus was the only one that could accommodate our anticipated growth, so it became the frontrunner..." Despite this apparent lack of competition, Governor Tim Pawlenty is pushing for an $8.7 million sales tax break for Thomson while locally the company is pursuing another $1.5 million in tax increment financing. San Antonio's CIED Fund grows giant deal for Microsoft
Late in January San Antonio officials announced a deal with Microsoft Corp. to develop a $550 million data center in the Texas city. San Antonio is giving $5.2 million in infrastructure subsidies along with a 10-year property tax abatement valued at approximately $20.7 million. The $5.2 million in subsidies comes from the Community Infrastructure and Economic Development or CIED (pronounced "seed") fund. Financed through a one percent tax on local utility customers, it was originally called the "Overhead Conversion Fund" and used to pay for the burial and rerouting of power lines. In 2005, the city of San Antonio struck a deal with the local utility company to expand the purpose of the fund. Renamed the CIED fund, these taxpayer dollars will also provide funding to "seed" large economic development projects that benefit both the city and the utility. Officials argue that Microsoft's annual power bill of approximately $1.4 million will defray the expense of the $20.7 million in property tax abatements. However, only 14 percent of Microsoft's annual bill will be routed to the City's annual fund to mitigate these costs (in the form of a utility tax). In today's dollars and rates, it would take approximately 106 years to pay off the tax break.
A bill that would give energy tax breaks to Marcal Paper passed the New Jersey Assembly today despite ongoing concerns regarding the company's environmental record. Last October, the state issued Marcal a fine for a series of air violations. In December, after Marcal filed for Chapter 11 bankruptcy because of rising energy costs, state legislators introduced the bill that would exempt Marcal from paying state energy taxes for seven years. Proponents argued that Marcal deserves the support because it is the largest consumer of waste paper in the state and employees 850 unionized workers. At the same time, neighborhood residents and environmental groups have criticized the measure. The State Department of Environmental Protection has scheduled a hearing later this month to address residents' ongoing concerns about the air pollution caused by the Marcal plant.
Regardless of Marcal's environmental and labor practices, some have viewed the passage of a bill targeted to specific companies as a cause for concern. "This sets disturbing precedents," said Jon Shure, president of New Jersey Policy Perspective. "The state needs a clearer, less arbitrary process for determining whether companies ought to get special consideration at the expense of taxpayers and other companies that can't or don't seek breaks." The amended measure is awaiting action in the senate.
The closure of MZM Inc. -- a Washington D.C.-headquartered high-tech national security firm that worked on intelligence gathering for governments and private clients -- is costing the city of Martinsville, Virginia more than lost jobs. For the first time, the Virginia Economic Development Partnership will seek repayment of state economic development grants from a locality because of the failure of a private company. Four years ago Martinsville volunteered to stand in for the company in a performance agreement with the VEDP -- a state authority governed by a Board of Directors comprised of Virginian businesspeople. The VEDP has now decided to seek $150,000 of the $500,000 grant from the city after MZM hired fewer than half the number of employees required and was then forced to close last summer in the wake of a political corruption scandal. MZM president Mitchell Wade pleaded guilty to making illegal campaign contributions -- some of which went to benefit Republican U.S. Rep. Virgil Goode who, according to the VEDP, was the first to suggest that Martinsville sign the performance agreement in lieu of MZM. Goode claims not to have known the contributions were illegal, has not been charged with any criminal wrongdoing, and donated the amount to charity. UPDATE: Louisiana and Alabama up the ante to win German steel mill; Arkansas out of the running
While German firm ThyssenKrupp AG has confirmed that Arkansas is out of the running as a possible site for a $2.9 billion steel mill that would employ a projected 2,700 workers, Louisiana and Alabama continue their dogged competition to attract the firm. As previously reported in Eye on Subsidies, Louisiana Governor Kathleen Blanco and the state legislature have authorized $300 million in support for the project. However, Louisiana exempts development negotiations from open records law and the Governor is continuing negotiations in secret. The Baton Rouge Advocate speculates that the Governor may offer a portion of Louisiana's remaining $4.4 billion federal Gulf Opportunity Zone rebuilding funds. Alabama Governor Bob Riley is anteing up with an attempt to increase the state's bond issuing authority by $400 million. Currently, Alabama's Capital Improvement Trust Fund has only $45 million available for new projects. Riley's effort to increase Alabama's bonding authority is no small measure. It will require amending the state constitution, which requires approval by both the legislature and by voters in a statewide referendum. Despite the giveaway competition, it's questionable whether ThyssenKrupp is factoring subsidies into its location decision. Arkansas was ruled out because of its location, rather than its incentives package. Also, industry insiders question whether the incentives are a sound investment. Charles Branford, a steel industry analyst with Soleil Securities told the New Orleans Times-Picayune that while the U.S. steel market is growing, buying an existing site is a safer investment than building a new steel mill in today's economy. Perhaps then it is no surprise that ThyssenKrupp did not pursue building a new steel mill until after its offer to buy an existing steel mill operating in Canada was rejected. Philanthropy vs. Justice: Nike avoids taxes, contributes to Oregon schools
Nike Inc. has recently received praise for donating $9 million to public K-12 schools in Oregon, but critics point out that the company has gained far more from a corporate tax strategy that has reduced state revenues. Along with other corporations, Nike lobbied for and in 2003 won the adoption of the single-sales factor (SSF) tax system in Oregon -- saving itself millions in corporate income taxes every year. According to the Oregon Center for Public Policy, SSF saved Nike at least $16.7 million in 2006 alone. Overall, the switch to SSF cost the state's general fund $77.6 million in 2005-07 and $65.6 million in 2007-09, according to the state's 2007-09 Tax Expenditure Report. Here is how this unaccountable windfall works: traditionally, states have used three factors to divvy up the profits of multi-state corporations for tax purposes: the share of its payroll in the state; the share of its property in the state; and the share of its sales in the state. Under SSF, which has been adopted by about 10 states, payroll and property are ignored and only sales are considered.
Nike is headquartered in Oregon and thus has lots of payroll and property there, but only a small share of its sales are in Oregon -- meaning SSF has brought its tax bills way down. In exchange for the tax break, Nike and other windfall beneficiaries don't have to create or retain one job, provide one healthcare policy or do anything besides file their (secret) income tax returns. Eye on Tax Increment Financing
Wisconsin: The Center on Wisconsin Strategy (COWS) published a new report entitled "Efficient and Strategic TIF Use: A Guide for Wisconsin Municipalities." This tool kit for local decision makers provides ideas for increasing the accuracy of the "but for" test and offers insights into how to solicit high-benefit proposals and incorporate community benefits into TIF projects. Kansas City: ReclaimDemocracy.org released a new report by University of Missouri Professor Michael P. Kelsay entitled "Uneven Patchwork: Tax Increment Financing in Kansas City". According to the report, Kansas City, long known as a particularly bad TIF offender, can reform the fundamental fairness of tax increment financing though increased public participation, improved transparency and automatic clawbacks. Days after the release of the report, the Greater Kansas City Chamber of Commerce issued a report of its own regarding the major lack of municipal funding for capital improvements. Even this local cheerleader for corporate tax giveaways is acknowledging that excessive municipal borrowing for economic development subsidies threatens the city's future bonding authority and ability to plan for maintenance and infrastructure improvements. New Mexico: Development interests in New Mexico successfully lobbied to amend the state tax increment financing law so that its funds may be used for market-rate residential and retail/commercial development. This lobbying effort was led by Forest City-Covington, the developer responsible for Mesa Del Sol, a 3,000 acre master-planned community in Albuquerque. The tax increment financing district (or TID as it is called in New Mexico) will cover 40 percent of $640 million in infrastructure costs and is the first TID-funded development in the state of New Mexico. Projected to encompass 10,000 acres with more than 100,000 people and 10 million square feet of commercial, industrial and office space, the development threatens to divert huge sums of the city's tax base over time. The parent company of Forest City-Covington, Forest City Enterprises Inc., is the primary developer of the controversial Atlantic Yards project in Brooklyn, New York.
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