Tax Breaks Enrich Companies, Burden Communities

TheStreet.com

By John Solari

RENO, Nev. (J. A. Solari and Partners) -- The headline was an economic coup.

A massive Apple data center and $1 billion of investment from one of the world's most successful companies was coming to Reno. The city, a Northern Nevada community at the base of the Sierra Nevada mountains and minutes from Lake Tahoe, was working to reinvent itself in the face of a deep recession, a decline in gambling and large state budget deficits.

The deal, inked last summer, was generally heralded as an infusion of new economic lifeblood into the Reno community, and a move that would put the growing Reno technology sector into hyperdrive. It promised jobs, construction activity, and an economic ripple effect that would benefit businesses throughout the community.


But slowly the details of the deal became apparent. And those details were not as rosy. They underlined the precarious position that state and local governments are in when negotiating with the smartest, most successful and most powerful businesses on the planet, and how hard it is to calculate if what you are giving up is worth what you are getting.

In all, Reno and Northern Nevada is estimated to have handed out $89 million in tax breaks to Apple for the data center. Apple's sales tax rates (one of Nevada's most important ways to generate income because the state has no income tax and no corporate tax) will stand at less than 1%. The school district waved its taxes on the data center. And Washoe County tax abatements wiped out approximately 85% of Apple's property taxes.

In return for that $89 million, it is hard to put a finger on what Reno actually got. Data centers create little employment -- the 350-acre center is expected to employ only 35 full-time workers, but may provide work for up to 200 contract workers. The construction activity will certainly benefit the area, albeit in a relatively short window. And there will be a modest economic ripple effect. But many of Reno's citizens are left wondering: Is that worth $89 million?

The Reno data center debate is an example of a new economic landscape where city and state governments compete ruthlessly to land the biggest companies in the nation, at the highest price to themselves. The competition is dramatically lowering the bar for tax revenue and public benefits that come with becoming the new home of Amazon, Apple or Facebook's latest investment. Increasingly, local and state governments are paying for the privilege of having the world's top corporations set up shop in their city or state.

Reno, for example, was competing directly with Prineville, Ore., a location with no sales tax, and within a local "enterprise zone" that exempts the data centers from property taxes. This undoubtedly increased the tax break price tag that the city and county agreed to give Apple.

This intra-city competition has generated a great disparity between the playing field that large, multinational companies enjoy, and rules that are applied to medium and small businesses already located in a community, or contemplating a move.


Take Reno, for example. The area has many promising small- and medium-sized technology companies that employ more than 35 employees. None of them have the leverage to bargain for the deal that Apple received.

Part of the debate over governmental decisions like the Apple data center deal is a simple question: What could we get if we spent that $89 million elsewhere? It's not a perfect comparison -- maybe if Apple had chosen Prineville instead of Reno, that 350 acres planned for a data center would have sat vacant. But even a fraction of that $89 million could go a long way in a Northern Nevada region where government officials are working hard to close deep local and state budget deficits.

Conventional wisdom has dictated that local and state government should do whatever it takes to land the big names in business. But maybe it is time to rethink that strategy. Maybe, by not bending to the demands of the world's largest companies but instead investing in the growing regional businesses that are committed to contributing to the local schools, infrastructure and roads, local and state governments can take a stand for the businesses that offer more diversified employment and more community investment in local causes.

As it stands, the current bidding war that offers up tens of millions of dollars of tax breaks -- especially in states like Nevada that already offer a very generous tax structure -- is a race to the bottom. There will always be a more desperate competing government out there that will be willing to outbid the low bidder, offering up millions in funding for local schools, local infrastructure or local roads in exchange for the dubious distinction of being home to a new project with few jobs and a modest economic ripple effect -- and one big headline.

John Solari is managing partner at J.A. Solari & Partners in Reno, Nev.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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