State & Local Tax Incentives New Orleans, LA July 12, 2005 Bob Adair Entergy Services, Inc. The Woodlands, TX (281) 297-3676 bgadair@entergy.com 1 Map of Presentation Tax structures National studies of state & local tax burdens High level perspective of incentives Sample of incentives in each SEATA state Can government provide too much? Abuses? Cuno v. DaimlerChrysler facts, decision, response Do incentives matter in site selection decisions? Comments from SEATA economic developers Summary Additional questions, discussion 2
Tax Structure The overall concern is: tax structure and stability 3 Access to Raw Materials Qualified and Available Labor Market Laws, Regulations, Tax Structure Transportation Infrastructure
State & Local Business Taxes in FY 2004 General Sales, 23% Excise and Gross Receipts, 13% Corporate Income, 8% Unemployment Insurance, 7% Individual Income on Pass-Thru, 4% Property, 37% Licenses and Other, 8% Source: Council on State Taxation (developed by Ernst & Young), April 2005 www.statetax.org 5 State & Local Tax Burdens Top 5 1 Maine 2 New York 3 Hawaii 4 Rhode Island 5 Wisconsin Southeast 11 Arkansas 13 West Virginia 16 Louisiana 19 Kentucky 26 Mississippi 28 North Carolina 31 Georgia 33 South Carolina 34 Virginia 44 Florida 46 Alabama 47 Tennessee Lowest 48 Delaware 49 New Hampshire 50 Alaska Source: Tax Foundation (April 2005) www.taxfoundation.org/taxdata/show/335.html 6
How Do Executives Rank State Business Climates? Executive Rank Tax Burden 2 Georgia 31 3 Alabama 46 4 Florida 44 5 South Carolina 33 6 Tennessee 47 9 North Carolina 28 11 Mississippi 26 19 Kentucky 19 20 Louisiana 16 24 Virginia 34 1 Texas 43 Source: Site Selection Online at www.siteselection.com/issues/2004/nov/p746/ Tax Foundation at www.taxfoundation.org/taxdata/show/335.html 7 Tax Incentives for Industry Corporate Income Tax Personal Income Tax Excise Tax Land, Capital Improvements Equipment, Machinery Goods in Transit (Freeport) Manufacturers Inventories Sales/Use on New Equipment Raw Materials Used in Manufacturing Creation of Jobs Industrial Investment Tax Credits for Use of State Products Tax Stabilization for Specified Industries Research & Development Accelerated Depreciation: Industrial Equipment Source: Site Selection Online www.siteselection.com/issues/2004/nov/p763/ 8
Categories of Incentives Automatic Included in tax structure Over certain amount of capital investment, jobs, etc. Target businesses Discretionary Philosophy of economic development Political climate Cost/benefit 9 Common Factors for Incentives Capital investment Jobs Wages Product or service Company history economic, character Location Infrastructure needs 10
Sample of State & Local Tax Incentives Not intended as complete list of incentives. Sources CCH Business Incentive Guide and CCH Laws RIA Checkpoint State Economic Development web sites State Department of Revenue web sites Personal experience with state & local governments 11 Alabama Tax Incentive Reform Act of 1992 allows a company to reduce or eliminate certain sales, use, and/or property taxes in exchange for building or expanding an industry. Municipal and county governments or public industrial authority have discretion in granting tax abatements. Abatement up to 10 years, excluding school taxes. Eligible projects are new industrial and research enterprises (per SIC) and major additions to same, defined as 30% of cost of existing facility or $2 million. Inventories & pollution control exempt from property tax. Industrial revenue bonds Capital Investment Income Tax Credit 5% of capital for 20 years. Enterprise Zones 27 areas for tax credit/exemption. 12
Arkansas Industrial Revenue Bonds Provides manufacturers with lower than prime financing. Property exempt from property taxes during the lease-amortization period in which a local government retains title. PILOT negotiated not < 35% of property tax. Tax Increment Financing Finances improvements in a redevelopment district, which must be in an area that is considered blighted, deteriorated or underdeveloped. Bonds repaid by tax revenue from the incremental improvements. Super Project Over 500 jobs and $500 million allowed general obligation bonds and negotiated incentives. Targeted Businesses Discretionary tax credits and sales/use incentives for emerging technology sectors. Property tax exemption for seven years from the date of the location of a textile mill. Sales/Use Tax Back and InvestArk for startup businesses. 13 Florida Counties and municipalities may provide property tax exemptions to new or expanding businesses upon approval by referendum. Exempts renewable energy source devices for 10 years. Qualified Target Industry Tax Refund (property, sales, income) Jobs paying 150% or 200% of average. High Impact Performance Incentive Grant 100 jobs, $100 million investment (R&D 75 jobs, $75 million). Qualified Defense Contractor Tax Refund Up to $5,000 per job created or saved in FL by converting jobs from defense to civilian. Minimum 80 jobs. Capital Investment Tax Credit (income tax) Minimum 100 jobs and $25 million capital investment. 14
Georgia Local property tax incentives negotiated. State incentives statutorily structured and not subject to negotiation. Inventory Many counties exempt up to 100% of manufacturer s inventory under the local option Freeport law. In most counties, warehouse inventories are exempt from property taxes if destined to be shipped out of state. Enterprise Zone 5 new jobs, economically distressed areas. Income Tax Credits jobs, investment, headquarters, R&D, retraining, small business. 15 Kentucky Property Tax Abatements local governments are empowered to provide expanding and new businesses with property tax relief and abatements. Tax Increment Financing local revenue, project, and infrastructure. Industrial Revenue Bonds criteria: jobs, salaries, capital investment. Enterprise Zones sales/use tax exemption for building materials and equipment, reduced property tax rate, 10% credit on wages paid. Tax Credit Programs training, rural economic development, jobs, industrial, economic opportunity. Direct loans 16
Louisiana 10-Year Property Tax Exemption 5 years + 5 renewal Industrial Tax Exemption manufacturer s only Restoration Tax Abatement historical districts Biomedical and University Research & Development Inventory Tax Credit (property taxes deducted from state income tax) Enterprise Zone (sales tax) Quality Jobs (payroll credits and sales tax) Tax Equalization (equalizes with other states) 17 Mississippi Property tax exemption for eligible new or expanding businesses for 10 years, including school taxes. Capital investment over $100 million, PILOT at least 1/3 of tax. Property tax exemption for eligible new or expanding businesses for 10 years, except school taxes. Property tax exemption for hotels and motels in counties bordering the coast. 5 years for counties and 10 years for municipalities, except school taxes. Industrial Revenue Bonds property, sales, income tax credit. 18
North Carolina Property tax rebates negotiate with local government. Tax credits against state income, franchise, or gross premiums tax for job creation, investment, worker training, and R&D. Industrial Revenue Bonds Small Cities Block Grant for projects that create jobs. One NC Fund business or industry recruited by the Governor to locate or expand in NC (must be competing with other states). 19 South Carolina Property tax exemption for 5 years of county taxes - > $50,000 for manufacturing, > $50,000 and 75 jobs for distribution. Property tax exemption for 20 years with FILOT with reduced assessment ratio and frozen millages. Negotiated with local government. Property tax depreciation 11% per year to 10% floor. Inventories, pollution control, intangibles exempt. Enterprise Program quarterly cash refund of payroll taxes for 15 years. 10+ new jobs, discretionary. Income Tax Credit - $3,500 per job for 100+ jobs. Income Tax Moratorium 8 counties: 10 years for 100+ new jobs, 15 years for 200+ new jobs. 20
Tennessee Property tax exemption/pilot with 3 to 15 year tax freeze. Discretion of local government. Pollution control valued at salvage (.5% of cost) for property taxes. Jobs Tax Credit from franchise tax. Enterprise Zone reimburse part of sales/use tax incurred on building materials. Headquarters Tax Credit reduce sales/use tax rate to as low as.5% on building materials and M&E. Training Expenses partial reimbursement. 21 Virginia Property Tax Incentives Commercial/Industrial Counties and municipalities may provide, by ordinance, a partial exemption for improved property with substantial rehabilitation. May not exceed the increase in assessed value resulting from the rehabilitation or 50% of the cost of the rehabilitation. No more than 15 years. Hotel/Motel May not exceed either 90% of the total assessed value of the rehabilitated structure, or the increase in assessed value resulting from the rehabilitation, as determined by ordinance. No more than 25 years. Merchants County, city, or town not required to impose personal property tax on merchant's capital, including inventory. Pollution Control County, city, or town, may, by ordinance, exempt or partially exempt. Sales/Use Tax Tangible personal property used in manufacturing not subject to tax. Enterprise Zone, Major Facility Job Credit, Worker Retraining Credit. 22
West Virginia Property Tax Incentives Five-for-Ten Program Qualified capital improvements of at least $50 million to an existing base of $100 million or more. Assesses the new capital addition at a salvage value of 5 percent for the first 10 years. Tax Increment Financing Sales Tax Exemption Materials and equipment purchased for direct use in manufacturing. Tangible personal property and services for direct use in research and development. Corporate Income Tax Credits business investment & job expansion, manufacturing investment, economic 23 opportunity. How much is enough? Can government offer too much? Goal: Remain competitive with other states plus incentives that favor your state or location. 24
Cuno v. DaimlerChrysler Project and Incentives In 1998, DaimlerChrysler entered into an agreement with the City of Toledo to construct a new vehicle assembly plant near the company s existing facility. $1.2 billion capital investment and several thousand jobs. Ten-year 100% property tax exemption. 13.5% investment tax credit against corporate franchise taxes. Source: Case 01-3960, U.S. Court of Appeals, Sixth Circuit, 9/2/04 25 Cuno v. DaimlerChrysler Investment Tax Credits The distinction between a subsidy and a tax credit, in the constitutional sense, results from the fact that the tax credit involves state regulation of interstate commerce through its power to tax. We conclude that Ohio s investment tax credit cannot be upheld under the Commerce Clause of the United States Constitution. Source: Case 01-3960, U.S. Court of Appeals, Sixth Circuit, 9/2/04 26
Cuno v. DaimlerChrysler Property Tax Exemptions The conditions imposed on the receipt of the Ohio property tax exemption are minor collateral requirements and are directly linked to the use of the exempted personal property. Unlike an investment tax credit that reduces preexisting income tax liability, the personal property tax exemption does not reduce any existing property tax liability. If universally applied, the new property would escape tax liability irrespective of location. We hold that the Ohio personal property tax exemption does not violate the dormant Commerce Clause. Source: Case 01-3960, U.S. Court of Appeals, Sixth Circuit, 9/2/04 27 Cuno v. DaimlerChrysler Status Defendants petitioned the Sixth Circuit Court for a rehearing. Denied January 18, 2005. Pending hearing by U.S. Supreme Court. 28
Cuno v. DaimlerChrysler Response to Sixth Circuit Court Decision National Governors Association 10/7/04 letter to Senate supporting legislation to clarify that state incentives are allowed: These statutes are vital tools in promoting economic growth and fostering new business throughout the United States. U.S. Congress introduced Jobs Investment Act of 2004, H.R. 5427 and S. 2881, 108th Congress (2004). No action taken. U.S. Congress introduced Economic Development Act of 2005, H.R. 2471 and S. 1066 (filed 5/18/05). 29 H.R. 2471 and S. 1066 (2005) Congress hereby exercises its power under Article I, Section 8, Clause 3 of the United States Constitution to regulate commerce among the several States by authorizing any State to provide to any person for economic development purposes tax incentives that otherwise would be the cause or source of discrimination against interstate commerce under the Commerce clause of the United States Constitution, except as otherwise provided by law. 30
Are tax incentives abused? Audience Comments 31 Do incentives really matter in site selections? Audience Comments 32
What do state economic development executives say about incentives? 33 State Economic Development Executives We were very aggressive in putting incentives on the table at the state and local levels Our belief was that we must make sure we help our existing industries expand in the state. Neal Wade, Director, Alabama Development Office www.siteselection.com/issues/2005/may/p246/ A major indicator of a state's business climate is its tax structure. Arkansas maintains a fair and probusiness tax system. Arkansas Department of Economic Development www.1800arkansas.com/incentives/index.cfm?page=taxation 34
State Economic Development Executives Florida offers bottom-line advantages for long-term profitability. Florida's stable and highly favorable tax climate provides advantages that make a Florida location profitable for every type of business. Enterprise Florida www.eflorida.com/financialadvantages/ Georgia provides a wide variety of statutory and negotiated incentives for eligible projects. As an active and interested business partner, Georgia will work with companies to provide the most attractive incentive packages, commensurate with project needs and resource availability. Georgia Economic Development www.georgia.org/economic/ 35 State Economic Development Executives Local Kentucky sales taxes are taboo. Property taxes are among the lowest in the nation And local jurisdictions may offer inventory tax reduction or exemption options. Kentucky Cabinet of Economic Development www.thinkkentucky.com/kyedc/topten.asp To be competitive, Louisiana has to give incentives in the most successful states the brunt of taxes isn't paid by business and industry. Site selection consultants look at a variety of things, including the government's willingness to spread the burden of taxation. Mike Olivier, Secretary of Louisiana Economic Development www.businessreport.com/newsdetail.cfm?aid=140 36
State Economic Development Executives Doing business in other states can be very taxing, but Mississippi's excellent business climate means its taxes are lower than other states' levels Incentives are a major factor in Mississippi's reputation as one of the best business climates in the United States. Mississippi Development Authority www.mississippi.org/why_ms/incentives.htm Like it or not, incentives are a significant part of the competitive landscape. We would be happy to eliminate incentives as a point of competition, but we cannot do that. And so our point is to be prepared when it makes sense to compete with incentives. Jim Fain, North Carolina Secretary of Commerce www.businessnc.com/archives/2003/06/economic_outlook.html 37 State Economic Development Executives South Carolina has a reputation as a superior business location, largely due to an exceptional economic climate that helps companies hold down operating costs and increase their return on investment. In addition, South Carolina s performance-based tax incentives reward companies for job creation and investment. South Carolina Department of Commerce www.callsouthcarolina.com/teamscpdfs/businessincentives.pdf The governor likes to say that a business relocation decision should not be based on incentives, but incentives are deal-closers. We have a complement of incentives that allows us to be competitive in almost every opportunity. Matthew Kisber, Commissioner, TN Dept of Economic & Community Development www.fortune.com/fortune/services/sections/fortune/region/2004_04tennessee.html 38
State Economic Development Executives Incentives are Virginia's investment in her economic future and a business decision for both the Commonwealth and the company. Virginia Economic Development Partnership www.yesvirginia.org/virginia_advantage/businessincentives.aspx West Virginia s aggressive program of incentives, in the form of tax credits and financing programs, fund the economic development projects West Virginians need for a brighter future. West Virginia Economic Development www.wvdo.org/business/taxes.html 39 SUMMARY Correlation between tax burden and economic development. Tax incentives are necessary to make tax structures more competitive. Tax incentives are a major factor in site selection. 40
Questions, Discussion General Sources Bob Adair Entergy Services, Inc. The Woodlands, TX (281) 297-3676 bgadair@entergy.com Economic Development Directory www.ecodevdirectory.com National Association of Counties www.naco.org State Information www.stateinformation.com State Legislatures www.legis.state.la.us/others.htm 41