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Tax Law

State Net Capitol Journal – December 17, 2012

Budget & Taxes

BUSINESS INCENTIVES BIG NEWS: Corporate tax incentives have featured prominently in the headlines following The New York Times' series last month criticizing the deals. 
Much of the news has been critical of the Times' piece. In a guest column on entitled "NY Times flubs figures on Michigan tax breaks," Tim Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research, an independent, nonpartisan research organization in Kalamazoo, questioned the $6.65 billion in incentives a database the Times developed in connection with the story says the state gives out each year. 
"This figure immediately seemed large to me," wrote Bartik, who was actually quoted in one of the Times' articles. "I have calculated in previous work that Michigan's business incentives total about $1 billion per year, which is certainly large, but nowhere near $6.65 billion." 
Bartik goes on to say that the reason the Times' figure is so large is because the newspaper included $4.83 billion in sales tax relief in its business incentives calculation for the state. 
Likewise, Dale Craymer, president of the Texas Taxpayers and Research Association, a business-backed nonprofit, took issue with the incentive that figured most prominently in the Times' calculation of Texas' nation-topping $19 billion per year in tax incentives: nearly $12 billion in sales tax exemptions and refunds for manufacturers. Craymer maintains that most other states, including California, offer similar breaks, but not all of them report the lost revenue the way Texas does. 
"By the Times' rankings, we are victims of our transparency because we actually show the numbers," Craymer said. "The manufacturing exemption in California alone is probably more than $19 billion. I can't prove that, but neither can the Times prove that we're the biggest." 
The Texas comptroller's office shares the view that the sales tax exemption for manufacturers shouldn't be considered an incentive because just about every other state offers one. 
"I don't think it's fair to say that the manufacturing incentive is an incentive tool for economic development because it's not causing people to come to our state over others," said a spokeswoman for the office. 
Times reporter Louise Story indicated in the first part of her series that it was based only on information that was publicly available. But she told The Texas Tribune that discounting Texas' sales tax exemption for manufacturers wouldn't change where it fell in the rankings. 
"Even without that particular sales tax exemption, Texas comes out with the most expenditures as far as public data shows," she said in an email. "And, keep in mind that Texas's figure is not comprehensive. While some states' figures include local property tax breaks to companies, Texas's figure is lacking in many of those abatements, which would increase the total for Texas even more." 
But Randy Shaw, the editor of BeyondChron, an alternative daily in San Francisco, accused Story of failing to check her facts on the tax exemption the city granted to Twitter. Shaw said the Times suggested the tax exemption the city granted to Twitter contributed to cuts to the city's public parks, but those cuts occurred in the years prior to Twitter's move to the city in 2012. 
"So contrary to the Times' reporting, there is absolutely no connection between reduced park budgets in prior years and tax incentives for Twitter's relocation," he said. 
Shaw also said the Times ignored a key distinction between San Francisco's Mid-Market tax exemption and other incentives cited in its series: "the use of the tax incentive not to 'save' the jobs of a single company but to stimulate economic activity in a long troubled geographic area." 
"One would never know from the Times story that the Twitter tax exemption spawned the greatest wave of investment in Mid-Market in over fifty years, greatly boosting city revenue," he said. 
The various reports challenging the Times series prompted George Brint Ryan, an influential tax consultant in Dallas whose name also appeared in the Times piece, to remark: "There is growing evidence from many independent and unrelated sources that Ms. Story failed to accurately tabulate the incentives available, cherry picked, or manipulated examples to try to create an artificial relationship between the exemptions and cuts to other government funding issues." He added that there had been a long debate in Texas over the issue going back many decades, that there was nothing new "in questioning the effectiveness of these programs" and that they deserved "close scrutiny but not at the expense of fairness and accuracy." 
It seems they will be getting closer scrutiny in his state. Two legislative committees - the Senate Economic Development Committee and a select joint committee on economic development - were scheduled to take up the issue last week. And as a member of the latter committee, Ryan will have an opportunity to assure the scrutiny is fair and accurate. 
Another state where incentives may soon be getting more scrutiny is West Virginia. The state was second only to Alaska in business incentives measured by population size - $845 a year per person - according to the Times. The state also had the third fastest growing economy in the country in 2011. But although that growth was driven primarily by the mining industry, that's not where the incentive money has been going. The advertising industry, agriculture and manufacturing received the biggest breaks, the Times reported. And with the state's budget now under pressure because its biggest tax revenue generators, coal and gambling, face growing competition from natural gas and new casinos in neighboring states, respectively, Senate Finance Chairman Roman Prezeioso (D) said incentives are likely to receive a colder reception from lawmakers, who have been overwhelmed recently by the number of tax breaks being sought. 
"The Economic Development Committee met weekly, and they were passing us a tax credit on something every week," Prezioso said. "There were just so many of them we couldn't get our arms around it, and subsequently we didn't do a whole lot of them." 
Still, Oregon lawmakers were reportedly planning a short special session last week aimed at securing an expansion of sports giant Nike's operations in the state. The company, whose world headquarters are in Portland, acknowledged that it was being wooed by other states but that it had promised to bring at least 500 jobs and $150 million in capital investment to Oregon over the next 5 years if the expansion deal is approved. 
The deal appears be the sort Dick Lavine, a senior fiscal analyst with the left-leaning Center for Public Policy Priorities in Austin, Texas, had in mind when he said last week that the Times' series had drawn more attention to economic development programs around the country and could lead to more serious debate about whether those offered by his state are justified. 
"If there are incentives, they really have to be limited to those very few mega-projects that are really worth it in terms of the nature of the jobs created, local spinoffs, and...if [the companies] have a choice in location," he said. 
Supporters of Texas' current approach, however, including Gov. Rick Perry (R), say the superior performance of the state's economy in recent years compared to that of most other states proves incentives work. 
"That's called competition," Perry said in a recent guest-host spot on CNBC's Squawk Box. "In the real world, that's how you compete for those businesses." (PR NEWSWIRE, ROCK HILL HERALD, MLIVE.COM, TEXAS TRIBUNE, CHARLESTON DAILY MAIL, BEYONDCHRON.COM, STATELINE.ORG, STATE NET) 
SCOTT URGES ALLIGNMENT OF COLLEGES WITH JOB MARKET: Florida Gov. Rick Scott (R), a former businessman, campaigned in 2010 on a promise to run the state like a successful business. Now he's looking to apply that approach to the state's colleges.  
The governor's task force on higher education has recommended freezing tuition rates three years for majors that are in demand in the job market, with state financing making up the tuition gap. The move would make it cheaper to get an undergraduate degree in engineering or biotechnology - currently among the most expensive majors - than to get one in history or psychology. 
Following the lead of Texas Gov. Rick Perry (R), who proposed a similar idea last year, Scott has also challenged the 28 schools in the state formerly known as community colleges to offer some of their four-year degrees for $10,000, roughly $3,000 less than they typically cost. 
"Every business has to figure out how to make itself more efficient," Scott said in proposing the idea last month. "They've got to use technology. They've got to use the Internet, things like that. We can do the same thing with our state colleges." (NEW YORK TIMES, MIAMI HERALD) 
TX PENSION MANAGER'S PORTFOLIO GAINS NOT AS BIG AS PAYCHECK: Britt Harris, chief investment officer of the Teacher Retirement System of Texas, earned over $1 million in salary and bonuses last year, more than any other public pension employee in the nation's 12 most populous states, according to data compiled by Bloomberg. That sum was evidently required to lure Harris away from Bridgewater Associates, LP, the world's largest hedge fund, where he'd been CEO for six months, after managing the pension fund at Verizon Communications, Inc. The Texas fund's investment return over the five years since Harris' arrival in 2006 was 13.17 percent and 2.12 percent over the last three years. 
The three-year investment return of the Ohio Police & Fire Pension Fund was just slightly lower, at 1.94 percent, but its five-year return was slightly higher, at 13.25 percent. And its top paid executive, William J. Estabrook, earned $231,614, less than a quarter of what Harris did. The New Jersey Division of Investment, meanwhile, did better than the Texas teachers' fund over the last three years, posting a 2.46 percent return, and didn't do much worse than the Texas fund over the last five years, growing 11.11 percent. And that fund's director, Timothy Walsh, was paid even less, $185,000 plus $7,500 for moving expenses. 
"These guys may claim to be worth their weight in gold," said Edward Siedle, president of Benchmark Financial Services in Ocean Ridge, Florida and a former U.S. Securities and Exchange Commission attorney. "They absolutely can't justify it." (BLOOMBERG) 
BUDGETS IN BRIEF: has reached an agreement with MASSACHUSETTS to begin collecting sales taxes from residents there. Unlike accords the online retail giant has struck with other states, the MASSACHUSETTS agreement applies exclusively to Amazon, meaning other Web retailers, like, would be able to offer lower prices (WALL STREET JOURNAL). • Federal contract awards dropped roughly 52 percent, from $7.2 billion to $3.4 billion, in WISCONSIN in the fiscal year that ended Sept. 30, according to preliminary figures from the Wisconsin Procurement Institute. Much of that decline came from the U.S. Army, whose spending is down more than 75 percent in the state (MILWAUKEE JOURNAL-SENTINEL)

- Compiled by KOREY CLARK

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