By John Borland
Staff Writer, CNET News.com
November 13, 2003, 4:00AM PT
The funds are part of a "claw back" consolation clause written into a deal drafted by local officials to offer major tax breaks as an incentive to keep Philips operating a local manufacturing plant. If Philips closed the facility, according to the agreement, it would still have to pay the schools some money to help offset tax revenue that they had earlier given up as part of the incentives.
"We haven't been at the table--we haven't been part of the discussion," said Miguel Acosta, an Albuquerque school board member who has opposed such tax incentives. "If it hadn't been for the claw-backs, we would have been left holding the bag."
The experience illustrates the risks to public school funding that are inherent in tax breaks aimed at luring and keeping companies in a region for jobs and other economic reasons. The debate over these incentives has become increasingly acrimonious in the last few years as corporations have drastically cut operations and spending because of declining business--which in turn has resulted in highly visible shortfalls in tax revenue and other resources for public institutions.
On one side of the issue are regional governments that insist they must take desperate measures to bolster their local economies and companies that say they provide many financial and other benefits that are not factored into these relationships.
On the other are critics and school advocates who call such deals a dangerous trend that result in erratic educational planning and sudden loss of crucial resources. According to the National Education Association, schools are particularly vulnerable, because local property taxes account for nearly 30 percent of their funding but are often a prime target for reduction in corporate incentive agreements.
"They're too ubiquitous," said Greg LeRoy, chief author of a recent NEA report on the ties between schools and corporate tax breaks, who is also the director of Good Jobs First, a public policy research group in Washington. "Any company building anything new in the last 15 years would automatically ask for them, or its CFO might get fired."
Tax incentives long predate today's technology companies, initially used to court heavy-industry businesses such as auto plants and steel mills. But the practice has become especially controversial for the tech industry because of its unique relationship with education. For philosophical as well as financial reasons, technology executives have pushed for school reforms in legislation and donated millions of dollars in cash and equipment to the cause.
"The most intelligent thing the U.S. government can do is to beef up the education system," Craig Barrett, Intel's chief executive officer, said in an interview last month. "The K-12 system does a good job of weeding out any students interested in math and science. We prepare them to be lawyers and consultants instead."
Intel has devoted far more than rhetoric to the subject. In fact, a decades-old relationship between the mammoth chipmaker and another town in New Mexico is cited frequently as a classic case of tax incentives among high-tech companies.
A company town--and school
In the suburbs of Albuquerque, Intel established a facility in Rio Rancho with 25 employees in 1981 on land that was largely home to grazing cattle just 40 years ago. The company later built a string of manufacturing plants, including some of the most advanced chipmaking facilities in the world, which formed the seeds of what is now referred to as a "Silicon Mesa."
The result was an unprecedented deal hashed out between Intel, local county officials, and the Rio Rancho school district. Intel agreed to contribute $30 million of its own for a new high school, in return gaining access to $8 billion in subsidized "industrial revenue bonds" that would be used to build more plants. As part of the deal, Intel would receive close to $645 million in tax breaks, according to estimates by the SouthWest Organizing Project, a local tax activist group.
The Rio Rancho case was viewed by many as a flaw in tax incentive policy. Opponents, who still view the deal with hostility, say that Intel has drained money from the schools by not paying property taxes despite its contribution of a high school and other donations.
Intel, for its part, points out what it has brought to the area: a $399 million annual state payroll, $175 million spent on local goods and services in 2002, and payment of more than $400 million in New Mexico corporate income tax and employee withholding tax since 1995.
"The bottom line is that while you can try to quantify what a company receives in tax assistance, good companies bring a lot to the table that is not seen by dollar signs," Intel spokesman Terry McDermott said. "It's not like Intel came in and pillaged the land and disappeared. We've been here 23 years."
He noted further that the company is actively engaged with education systems in Rio Rancho and elsewhere in New Mexico at many levels. Intel trains teachers in math and sciences, sets up "computer clubhouses" in low-income areas, and donated more than $100,000 last year alone to schools where its employees volunteered.
That involvement has kept the community on Intel's side of the debate.
"My impression has been that Intel has been a big positive for us and a good corporate citizen," said Don Schlichte, president of the Rio Rancho school board. "That's the sentiment here."
Blueprint for other deals
The relative success of the arrangement encouraged Intel and other technology companies in negotiating tax breaks with local governments in various regions. The chipmaker has since brokered three tax-incentive deals in Oregon, where Intel is one of the state's larger employers.
A revenue crunch prompted the state to cut the school year to the shortest length in the country last year, but Oregon still offers a "strategic investment program" that aims to attract businesses to the region by limiting property taxes on new facilities exceeding $100 million--an incentive that is eventually expected to save Intel more than $200 million on one facility alone in the town of Hillsboro. In addition, one recently revised deal even eliminated a previous requirement that Intel pay local officials $1,000 each year for every employee hired above a 5,000-worker maximum, in order to pay for increased stress on roads and other infrastructure.
Although local school administrators have denounced such antitax initiatives, they are painfully aware of the unforgiving economic realities facing the state, which has one of the largest unemployment rates in the nation at 8 percent.
"It's worth more to us to see a thriving, strong economy that attracts people to the area," Hillsboro School District Superintendent Joe Rodriguez said. "If Intel had not been encouraged to do its expansion through the 1990s, they probably would not be here. We're talking about facilities that are generating dollars for schools and counties throughout the state."
Tammy Propst, the national partner in charge of KPMG International's strategic relocation and expansion consulting practice, agreed that tax incentives aren't the top consideration for high-tech companies. Instead, she said, the first factor is usually proximity to research universities, from which knowledge and skilled employees can flow. A close second is the quality of life, ranging from transportation to education for employees' children.
Still, Propst said, the tax issue can definitely come into play. "All of those other things are more important than an incentive package," she said. "But when it gets down to three or five locations, all other things being equal, then it becomes a business decision."
That also makes it a business decision for local governments and school boards weighing whether to offer such arrangements. The NEA study--which did not make a distinction between technology and other companies--found that tax losses and policies varied widely but were significant to many. Although Montana schools lost about $16 million a year to subsidies, for instance, Minnesota corporate tax incentives created a $112 million shortfall in school funding that needed to be recouped from other parts of the state budget.
The study recommended some policy changes to help local governments avoid disaster, such as shielding educational funding from tax packages and giving local school boards a voice in the negotiations of these deals. The Philips package negotiated by Albuquerque was one of the first to follow the study's proposal for claw-back provisions that allow schools to get some money if all else fails.
Albuquerque senior economic developer Deirdre Firth, who was in charge of the city's relationship with the company when the arrangement was made, says the school funding salvaged from the deal shows that incentives can work even if the corporations disappear.
"Our philosophy is that we want to be a real incentive or inducement, not throw these all over place," she said. "We've been in the process of rethinking how to do these for some time, but what the Philips situation in the end showed people is that the process worked."
CNET News.com's Evan Hansen contributed to this report.