This document originially appeared in the August 19, 2014 edition of State Tax Today.
Officials with Intel Corp. are closing in on a multibillion dollar agreement with local leaders in Oregon that would allow the company to cap its taxes on personal property, in a deal criticized as too generous for a company with deep roots in the state.
The deal would come through the state's Strategic Investment Program (SIP), which allows incentives for companies undertaking some types of projects worth at least $100 million. In exchange, associated property with a real market value above $100 million can be exempted from tax for 15 years.
Under the terms laid out in a draft agreement provided by Washington County, Intel would be required to make various payments to the county and the city of Hillsboro in exchange for their abatement of taxes on its facilities for semiconductor research and manufacturing:
- a guaranteed annual payment of $2.87 million;
- a community services fee equal to at least 25 percent of its exempted taxes and at most $2 million;
- a payment in lieu of taxes calculated to recapture taxes on real property and buildings;
- a charitable fee of $100,000 for each of the first six years; and
- property taxes as normally required on the first $100 million in assessed value.
In a press release announcing the deal and in interviews with Tax Analysts, local officials said they had secured the retention of 17,000 jobs at Intel, and they highlighted the ripple effects of Intel's continued presence, which they said amounts to three more jobs in Oregon for every Intel employee in Washington County, citing a study Intel funded in 2012.
Local officials also said the area was also gaining certainty by locking in the terms of the deal for 30 years and saving taxpayers the expenses associated with conducting those negotiations.
The deal is a second major tax victory for Intel in less than a year. In December, Gov. John Kitzhaber (D) secured its 30-year commitment to stay in Oregon and create 500 new jobs within five years, according to Vince Porter, a policy adviser to the governor. In exchange, the company is guaranteed to be able to use single-sales-factor apportionment for the term of the agreement.
Questionable Returns for Local Governments
While the benefits of the deal are clear for Intel -- Washington County Commissioner Roy Rogers projected it would save the company and cost local governments about $3 billion over the course of 30 years -- several observers questioned whether that money buys anything the county didn't have already.
Intel announced in 2012 that it had plans to double the capacity of its D1X fabrication facility in Hillsboro. That construction is still going on now, and Intel spokeswoman Chelsea Hossaini confirmed that it would be used to take advantage of the newly available incentives. She could not identify any investments that the company is planning to make beyond those already underway.
The terms of the agreement would bring Intel's taxes and fees even lower than the amounts the company is now paying under the terms of a pair of separately negotiated SIP deals from 1999 and 2005.
The county reported that in tax year 2014, Intel paid about $40 million in taxes and SIP fees; by comparison, it is expected to pay a total of $350 million over the course of the new agreement -- an average of less than $12 million a year.
And while the local SIP agreement is being billed as a job-retention package, it does not actually require any jobs to be retained -- in contrast with the 2013 deal with the state, which required not just job retention but the addition of new jobs within five years.
Based on those numbers, Leigh McIlvaine with Good Jobs First suggested that the city and county were walking away from the negotiating table empty-handed.
"I honestly can't think of anything they're getting in return for it," McIlvaine said. "It seems so very backwards."
McIlvaine said the government seemed to be pursuing economic development tactics rather than strategies -- handing out tax breaks for economic development without really thinking about what they could yield in the long term.
"Oregon is making some weak deals as far as economic growth goes," McIlvaine said. She conceded that this deal would attract some physical investments but said, "That is not the same thing as guaranteeing that growth in the workforce in these companies is occurring in Oregon."
The other main benefit that the county touted -- additional certainty -- may already have been in place, as well; a company executive said last year that the state deal "provides Intel with the certainty needed to expand our investments in a globally competitive industry."
Without a provision to guarantee job retention, the deal is actually more likely to lead to job losses, said Chuck Sheketoff of the Oregon Center for Public Policy. "In 30 years, they could be doing a lot more with robots than people," he said. "They'll probably always need some people, but they'll probably also get more mechanized over time."
Sheketoff questioned whether the deal would benefit anyone other than Intel and the elected officials who could use it when they run for reelection. "Intel is getting headlines. The politicians are getting feel-goods, but we may be providing them tax incentives for robots," he said.
For the taxpaying public, there aren't any real benefits, Sheketoff said. "They're getting 30 years of certainty that Intel's not going to pay its fair share in taxes," he maintained.
Would Intel Leave Oregon?
Intel's spokeswoman wouldn't say whether the company would make the proposed investments in its Oregon facility in the absence of the SIP agreement, though she did acknowledge that the company's success already requires it to continually reinvest there.
Hossaini said that to continue investing in Oregon, the SIP was "essential." The total projected savings from that agreement -- $3 billion over 30 years -- are less than a third of the profits Intel reported for 2013 alone, she said.
Suji De Silva, a market analyst for Topeka Capital Markets, said the company is already locked into its Oregon facilities.
The possible investments associated with the deal -- maxing out at an average of $3.3 billion annually -- don't seem to go far beyond the norm, De Silva said, as Intel is already talking about spending about $11 billion on capital expenditures every year, much of which he said will invariably go to equipment upgrades.
"Oregon is a very important location to them, and I think Portland is one that they are very committed to in terms of manufacturing," De Silva said. "Upgrades are normal course for the company because clearly they have a huge manufacturing footprint they have to keep current."
McIlvaine also pointed to workforce reductions in other locations, which she said signal that Intel has already been planning for some time to invest in Oregon.
Given those signals and the previous commitment with the state to increase hiring, a tax break for new equipment for those employees represents both bad tax policy and bad economic development policy, said Lyman Stone of the Tax Foundation.
"Intel's already agreed to be there for 30 years, so why would you offer this tax break if you're not going to get any new jobs?" Stone asked. "That's a pretty weak economic development argument, to be frank. They're not going to put 17,000 people there and give them no computers."
But rather than simply asking whether it got anything from the deal, the county should instead be asking whether it could have gotten something better, Stone said.
"The question isn't: 'Are there benefits?' The question is: 'Are there more benefits than something else you could have spent $3 billion on?'" Stone said. "Does anyone really think this is the best use of $3 billion at the county government level? This must be like half their tax base."
Washington County had a 2013 budget of $756 million and tax revenue of $152 million.
A Philosophical Approach to Taxes
While outsiders may focus on which bargaining chips were traded for what, Rogers at times discussed the issue in more philosophical terms and drilled into the policy implications of the taxes that are being abated.
If the government is a business designed to provide services, Rogers said, Oregon's tax on tangible personal property is an "anomaly," imposing higher taxes when an old piece of equipment is replaced with a newer one.
Stone argued that the tax is hardly anomalous, pointing to a 2012 Tax Foundation study that found a majority of states imposing similar taxes, but he agreed that tangible personal property taxes have damaging effects.
"They're economically some of the most destructive taxes in existence," Stone said. "It's essentially a tax directly on new equipment, and new equipment is the lifeblood of a high-tech firm."
That was the sort of thinking that Rogers said informed the negotiations, in which the county asked for payments on new land and buildings that would require the government to provide additional services for, but not on new equipment to replace the old.
"If we're a government that's designed to provide services to the public," Rogers asked, "what are they buying that they aren't already getting, that they don't already have?"
Though the county agrees that the tax is bad for business, Stone said it is taking too shortsighted an approach to the problem. Tangible personal property taxes are bad for Intel, he said, but they're just as bad for all the other employers in the county.
Stone said the correct approach would be to lobby the state to repeal the tax, but smaller businesses are now unlikely to have an ally in Intel, which has a competitive advantage over them and would have a hard time selling shareholders on policy abstractions that could cost millions or billions in the short term.
"Incentives absolutely do have a corrosive effect on the ability of states to adopt sound tax policy. A lot of businesses who know that sound tax policy is good . . . they also have to look out for their bottom line," Stone said. "Generous incentives, they kind of break up the coalition for fairer and more efficient tax policy."
Even if critics feel the county isn't getting enough in return, Rogers said he's comfortable with the certainty he gets from the deal and the jobs that he expects to retain as a result of it.
Rogers acknowledged that Intel is unlikely to pack up and leave Washington County overnight, but he said the county has to look further into the future and protect against the possibility of it shifting its operations out of state or overseas piece by piece.
"There are people who are being very critical and saying, 'You gave away the farm, and why didn't you do this, and why didn't you do that,'" Rogers said. "Of course, those are always easy questions, and Monday-morning quarterbacking is always going to be successful."