Tax Law Blog | IRS Tax Attorneys

Cash-strapped communities have a message for corporations that promised jobs in return for tax breaks: A deal’s a deal.

As the economy sputters along, municipalities struggling to fix roads, fund schools and pay bills increasingly are rescinding tax abatements to companies that don’t hire enough workers, that lay them off or that close up shop. At the same time, they’re sharpening new incentive deals, leaving no doubt what is expected of companies and what will happen if they don’t deliver.

“We will roll out the red carpet as much as we can (but) they are going to honor the contract,” said Brendon Gallagher, an alderman in DeKalb, Ill., where Target Corp. got abatements from the city, county, school district and other taxing bodies after promising at least 500 jobs at a local distribution center.

So when the company came up 66 workers short in 2009, Target got word its next tax bill would be jumping almost $600,000 — more than half of which goes to the local school district, where teachers and programs have been cut as coffers dried up.

The newfound boldness comes from communities and states that have long bent over backward to lure companies and jobs by offering abatements and other incentives — to the tune of an estimated $60 billion a year in the United States, according to the Washington-based economic development watchdog group Good Jobs First.

The willingness to write — and enforce — the “clawback” provisions comes even as companies across the country struggle and against a broader backdrop of governments getting tough on business practices.

What’s more, the poor economy has communities thinking about how the tax breaks they dole out will play with residents who have grown increasingly angry at the thought of anything that hints of corporate welfare.

“The public is a lot more aware of tax abatements and there’s a climate of skepticism about what can be perceived as corporate handouts,” said Geoff McKimm, a member of the Monroe County Council in Indiana.

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The North Carolina House has tentatively approved changing the state’s corporate tax laws to make them more attractive to billion-dollar investments.

The House voted 81-31 Tuesday in favor of a bill changed last week to push companies to counties where unemployment is high. A final House vote is scheduled Wednesday.

While the law makes no reference to a specific business, The Associated Press reported last week that the company targeted by state business recuriters is Apple Inc., which is considering a $1 billion data center.

The tax changes would alter how corporate income taxes are calculated by giving breaks to companies with large shares of their property in North Carolina but a relatively small share of U.S. sales in the state.

Another Senate vote would be needed due to House changes.

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President Obama roiled the business community Monday by proposing to hike taxes on income generated outside the United States. The changes, which supposedly would close loopholes and remove incentives to export jobs and investment, would bring an estimated $210 billion to the Treasury over the next decade. We’re all for closing loopholes and ending tax shelters that enable the wealthy to hide income. But we’re not convinced that changing tax law can stop corporations from steering jobs and capital to countries with the lowest costs.

The smallest piece of the package, and the easiest to support, is devoted to overseas tax havens used by wealthy individuals. The administration aims to crack down on individuals who conceal income in foreign shelters and the companies that assist them. Obama also wants to eliminate a technique that many multinational businesses use to shift profits from operations in high-tax jurisdictions to those in low-tax ones. We support efforts to prevent companies from playing shell games overseas, although the administration’s proposal may help foreign treasuries more than the IRS.

The most troubling pieces of the package are the ones aimed at “removing tax incentives for shifting jobs overseas.” In particular, Obama wants to reduce a tax break for companies that invest in foreign subsidiaries but don’t bring the profits back to be taxed at the (presumably higher) U.S. rate. The underlying assumption is that foreign investments hurt American workers and should be discouraged by the tax code. But there’s growing evidence that U.S. companies’ foreign investments lead to more investment at home too, as they expand the research and development and administrative work at their headquarters to support their global expansion.

All of the other major industrialized nations have recognized the domestic benefits that multinationals can bring, and they no longer attempt (or have agreed to stop trying) to tax income that their companies earn outside their borders. Washington has to recognize that multinational companies move jobs and factories to lower-cost countries for many reasons and that making its tax code more punitive to foreign investment won’t reverse that process. Instead, it’s more likely to drive more of those corporations out of the U.S. or into the arms of foreign suitors. There are better ways to encourage multinationals to invest here and to reduce the distortions caused by unequal global tax rates — for example, by broadening the corporate tax base and reducing rates so they’re more competitive internationally, or by improving U.S. workers’ skills. Obama’s proposal, however, is more about populism than effective tax reform.

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