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Tax break program reflects changing business climate

The Oregonian|Ted Sickinger|August 2, 2006
OregonGeneralTaxes & Subsidies

Last week, state economic development officials approved a 15-year property tax break for a $193 million paper towel machine that Georgia-Pacific Corp. might install at its Wauna Mill complex near Westport..... The first time was in May, when the state approved a SIP agreement for a $141 million wind farm in Union County.


Last week, state economic development officials approved a 15-year property tax break for a $193 million paper towel machine that Georgia-Pacific Corp. might install at its Wauna Mill complex near Westport.

It was the second time state and local officials have doled out a rejiggered version of Oregon's biggest corporate tax break, the Strategic Investment Program, since 2003. That's when lawmakers, to promote rural economic development, significantly lowered the bar on the size of projects that qualify for the program.

The first time was in May, when the state approved a SIP agreement for a $141 million wind farm in Union County. The third probably will come later this year, when Oregon extends the modified SIP to the biotech giant Genentech Inc., which is planning a $250 million drug-packaging plant in Hillsboro.

The flurry of new tax breaks is a far cry from their use in the mid-1990s, when Oregon developed the SIP as a special-purpose program to lure multibillion-dollar manufacturing investments and thousands of ... more [truncated due to possible copyright]

     

Last week, state economic development officials approved a 15-year property tax break for a $193 million paper towel machine that Georgia-Pacific Corp. might install at its Wauna Mill complex near Westport.

It was the second time state and local officials have doled out a rejiggered version of Oregon's biggest corporate tax break, the Strategic Investment Program, since 2003. That's when lawmakers, to promote rural economic development, significantly lowered the bar on the size of projects that qualify for the program.

The first time was in May, when the state approved a SIP agreement for a $141 million wind farm in Union County. The third probably will come later this year, when Oregon extends the modified SIP to the biotech giant Genentech Inc., which is planning a $250 million drug-packaging plant in Hillsboro.

The flurry of new tax breaks is a far cry from their use in the mid-1990s, when Oregon developed the SIP as a special-purpose program to lure multibillion-dollar manufacturing investments and thousands of new jobs from Intel.

Under the expanded SIP, Georgia-Pacific isn't promising any increase in jobs at the mill. Up and running, the wind farm will employ eight people. And while Genentech says it might employ 300 within 10 years, it isn't guaranteeing anything.

"This is an opportunity for people to stay employed," Patricia Roberts, a Clatsop County Commissioner, said of the Georgia-Pacific deal. "I know that sounds pretty harsh, but it's the reality. If we don't go along with them, they will be shutting down machines."

State and local officials say the rural SIP is a valuable new tool that bolsters state and county tax revenue and helps attract and retain well-paying jobs in some of the state's most depressed communities. But its transformation into a run-of-the-mill incentive says much about the ascendance of corporate bargaining power in the global economy and the leverage companies wield by instituting multistate incentive auctions for even routine plant investments.

Mike Salsgiver, deputy director of the Oregon Economic and Community Development Department, says the global job market has matured since the Strategic Investment Program was conceived. Job growth, while desirable, is no longer the main driver of the department's incentive agreements. The real yardstick is whether the tax breaks mutually benefit the business and its local community.

The rural SIP, he said, offers a predictable, flexible incentive that enables companies to continue investing while moving employment levels up and down to match market conditions.

"These communities must feel the agreements pencil out for them, or they wouldn't do it," Salsgiver said.

Tax watchdogs, however, argue that taxpayers are underwriting investments companies would make anyway. It's a hard claim to prove without putting jobs at risk, but opposition to the breaks spans some big ideological poles, from the liberal Oregon Center for Public Policy to the libertarian Cascade Policy Institute. Critics from both camps, as well as some academics, say the rural version of the SIP will only enlarge a tax break that doesn't pay for itself and creates an uneven playing field among businesses.

"The only case I've ever heard of where the SIP seemed to make sense was Intel," said Anthony Rufalo, a professor of urban studies at Portland State University who has studied the SIP. Granting it on smaller projects "doesn't seem to be good public policy."

The Strategic Investment Program was established in 1993 as a limited initiative to induce Intel to make mammoth factory investments. Lawmakers reasoned that semiconductor makers were worth the break because they invested disproportionate sums in their manufacturing equipment -- and ended up with larger tax bills -- but used no more public services than other businesses of similar size.

Intel's first SIP capped the taxable portion of its investment at $100 million, increasing 3 percent a year. In exchange, the California-based company agreed to pay community service fees equal to 25 percent of its tax savings.

Since Intel negotiated its first two SIP agreements with Washington County in 1994, it has invested $11.2 billion in Hillsboro and added about 10,000 local jobs.

Industrial investments of that size are rare, and to date, the state has extended the original SIP to only a handful of companies, all of them chip manufacturers.

But looking for ways to rekindle Oregon's moribund rural economy in 2003, lawmakers added a lower investment threshold for rural projects, capping their taxable portion at $25 million. They also limited community service fees on rural projects to the lower of 25 percent of the abated taxes or $500,000 a year.

The changes opened the SIP to a slew of additional industries, as evidenced by the applications approved or pending this year.

"By lowering the threshold, these things begin to pencil out for a broader array of industries and you begin to move the money around the state," said Salsgiver, formerly a government-relations employee at Intel involved in negotiating its tax breaks.

A precise cost-benefit analysis of a SIP deal involves a host of variables, including a company's investment and depreciation schedules, wage rates and job counts over 15 years. Moreover, companies can roll future investments into existing SIPs so that the actual exemption could end up being far more than originally projected.

Georgia-Pacific estimates that under the SIP, it would save $15 million on its new paper machine over 15 years. That's about $375,000 for every one of the 40 jobs it anticipates it could create. But the company is undergoing an efficiency drive that includes buyouts of salaried employees at the mill and may involve cuts of other hourly jobs. So, even if it builds the machine, it isn't forecasting any overall increase in jobs at the mill.

That's one reason Georgia-Pacific applied for the SIP instead of another property tax break called an enterprise zone, which requires a company to maintain specified employment levels.

"We're hoping this leads to more investment at Wauna in the future, and we can roll that investment right into the SIP program," said Mark Schneider, a project manager for Georgia-Pacific.

Clatsop County will collect property taxes on the $25 million investment, plus its community service fees. And the jobs pay $60,000 a year -- more than double the county average in 2004.

Said Roberts, the Clatsop County commissioner, "It's something, versus the possibility of a downward spiral."

Economic development officials from the state, Washington County and Hillsboro are pulling out all the stops for Genentech's proposed plant in Hillsboro. The governor has offered a $4.8 million package of training grants and work-force incentives. Hillsboro applied for a new enterprise zone specifically for the company's Shute Road site. Washington County is preparing to negotiate a SIP agreement.

Genentech, officials say, is exactly the kind of strategic company the SIP was intended to attract, one that pays well and could ultimately undergo huge expansion.

"We want these companies to plant their flag here, and what we've found is that when they do, they tend to stay and grow," said Ryan Deckert, a Democratic legislator from Beaverton who chairs the Senate revenue committee. "With the long-term prospects, it's hard to argue against it."

Some do. Critics say the company is building the equivalent of a bottling plant, not a research institute. The Portland area, they say, supposedly has a shortage of industrial land, so if Genentech didn't use the Hillsboro site, some other company undoubtedly would.

While Hillsboro wouldn't normally be considered rural -- it wasn't when Intel renegotiated its SIP agreements last year -- Genentech's prospective site was outside the urban growth boundary before December 2002, which qualifies it for the $25 million rural threshold.

"I'm very skeptical," said Bill Conerly, an economist who works with the Cascade Policy Institute and sits on the governor's board of economic advisers. "The initial use of the SIP for the semiconductor companies, there was some logic there. But as you lower the dollar threshold . . . most of these outfits don't need that."

Ted Sickinger: 503-221-8505; tedsickinger@news.oregonian.com

 


Source:http://www.oregonlive.com/pri…

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