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The answer to this perennial question is that one side typically loses more than it bargained for and the other, depending on the industry involved, may be far better off than the state or city that offered various tax incentives.

It appears that the art of a deal, when it comes to tax incentives, rests largely on what to give, how much to give, what is included, what is excluded, how it is applied, and what the beneficiary manufactures and if they have the ability to shift assets from one high business tax jurisdiction to a lower business tax jurisdiction.

This loophole relating to tax shifting is particularly interesting when it applies to the computer and software industries, such as Apple Inc.

Apple Inc. receives $207.8 million in incentives from Iowa

Apple Inc. is planning to build a $1.375 billion, 400,000-square-foot data center in Waukee, Iowa, with construction to begin early in 2018. The city of Waukee and the Iowa Economic Development Authority has responded with a $207.8 million incentives package to sweeten the deal. According to economic development representatives, there is a planned $188.2 million property tax abatement of 71 percent over 20 years.

The proposed data center would see the Iowa facility come online as part of a large group of other Apple data center locations in North Carolina, Nevada, California and Oregon.

Apple will buy 2,000 acres of land in Waukee on which to construct two data centers. As part of the incentives package, the company would also receive a $19.65 million investment tax credit for creating 50 jobs.

The construction side of the project is projected to create over 550 jobs. Tim Cook, Apple’s Chief Executive, says the project will ". . . create hundreds of jobs for people in Iowa from construction to engineering.” The new facility, which will run entirely on renewable energy, is slated to be online in 2020.

Apple has indicated that they intend to donate up to $100 million toward a “public improvement fund” whose first project will allegedly be a youth sports complex in Waukee. The proposed Youth Sports Campus plans to feature a greenhouse, fishing pier, playground and fields designated for high school and public sporting events.

Tax subsidies such as the one pertaining to Apple Inc., and the most recent large technology employer Foxconn (an overseas Apple supplier) in Wisconsin have become a flashpoint for many opposing such incentive packages and speculating that the winner in these kinds of deals is not the state but the company.

Incentives or giveaways?

Apple and Foxconn are not the only immense corporations to coax large tax breaks out-of-state and municipal governments. All 50 states are in the position to offer one or more tax breaks in the hopes of attracting new businesses or preventing existing ones from pulling up stakes and moving. While it may seem like a good idea to offer large businesses incentives to invest in the area, it may not always work out the way it is supposed to. In fact, such incentive packages have resulted in more than $80 billion a year in lost revenue.

One of the more well-known stories is that of General Motors (GM). The money given to the company to build plants and create jobs did not matter when in 2014 GM was commencing bankruptcy proceedings and had earmarked several factories to close. The communities that were home to the plants had provided free buildings, tax breaks, cash benefits and worker training to be partnered with GM and grow economically in the process.

What happened instead is that at least 50 plants were to be shut down and several states and local municipalities scrambled to offer money to save them. Ohio suggested a $56 million deal for the Moraine plant. Wisconsin offered $153 million to keep the Janesville factory. However, GM walked away and was bailed out by the federal government instead.

A recent study conducted by Cornell University, demonstrates that many incentive programs do not create new jobs, but instead shift them around allowing companies to receive incentives for planned programs that they had plans to implement. For instance, Louisiana did a follow-up on a project that was supposed to create 9,379 jobs. It found a net gain of 3,000 jobs. According to the company, the numbers were lower than projected because new jobs came at the expense of other local businesses instead.

Many corporations do not pay high taxes

Even though the corporate tax rate in the United States sits at 35 percent, often this is not the rate companies pay. The average corporate tax rate for Fortune 500 companies ran about 18.5 percent between 2008 and 2010. Only, a few companies paid over 30 percent and some received a tax refund.

Due to the numerous loopholes in U.S. tax law, many companies have become adept at avoiding paying the full tax rate. For example, companies will accelerate the rate of equipment depreciation because lower costs mean lower taxes. Others will officially incorporate outside the United States and pay lower taxes even though a substantial part of their operations may be within the country.

Additionally, firms can hold money outside the United States and thus avoid paying taxes. In fact, a study from Greenlining Institute suggests tech companies held roughly $430 billion outside the United States. Subsidiary companies outside the United States are a good way for large tech corporations to avoid showing taxable stateside profits and sales. Apple, of course, is a domestic tech company that does business globally and may well not pay anywhere near what the supposed corporate tax rate is.

Industry tax breaks are the result of lobbying in Washington

Why companies do not pay stated rates and why do the taxes vary more by industry in the United States than in other countries? Even the Congressional Budget Office notes industry-specific taxation, estimated in a 2006 paper, may range from “29 percent on computer equipment to negative 2.2 percent of petroleum and natural-gas structures.”

Industry specific tax breaks are the end result of cutthroat lobbying in Washington; lobbying that can make or break a business. Some lobbied tax breaks can boost a company, while others can damage companies. Companies are in an odd position on tax breaks when it comes to the convoluted U.S. tax system.

In trying to deal with that system, companies will often engage in questionable actions to receive tax breaks, such as perform unnecessary upgrades or open office locations in numerous states. Furthermore, according to Economist Martin A. Sullivan, the biggest reason for low effective tax rates for certain business sectors is the ability to move significant portions of their profits into low-tax jurisdictions.

For an in-depth look at the disparity between various industries, including the computer software and services niche, check out the graph created by Professor of Finance, Aswath Damodaran, at the Stern School of Business at New York University (NYU): http://www.investopedia.com/financial-edge/0811/highest-corporate-taxes-by-sector.aspx#ixzz4rdOfILGH

Who really wins when companies are offered large tax incentives? In the words of former U.S. President Barack Obama, "There are so many loopholes that have been written into the tax code...that we actually see our businesses pay effectively one of the lowest tax rates in the world."

About Author

Kerrie Spencer is a staff contributor to Bigger Law Firm Magazine.

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