May 1, 2006 4:00 AM PDT
The politics of tech's tax breaks
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A chart prepared by The Wall Street Journal in 2004 shows no relation between increased education spending by states and student test performance. As per-pupil spending went up, some states showed worse performance among students, some showed better, and many remained flat. Washington, D.C., city schools, for instance, had the highest increase in spending over a five-year period but eighth grade reading scores showed no improvement.
"They assume that the state owns 100 percent of everyone's income and assets, and everything that you're allowed to keep is a subsidy," Rockwell said. "That's entirely the wrong way of looking at things."
The "single sales factor" formula
The critics who accuse technology executives of hypocrisy are few but vocal. They point to examples like Microsoft, which calls for more education spending but takes advantage of legal tax breaks.
At a summit with academics in Redmond, Wash., last summer, for instance, Gates credited federal computer science grants for turning around the nation's performance in the area after the 1980s, when it was viewed as prone to "falling behind" other world powers.
Escaping the tax man
There's no way to know how much in taxes each corporation pays every year. But a very rough estimate can be obtained from financial disclosure statements (which use different accounting rules). Here are some examples of companies that may have been able to avoid paying taxes once in a while. But because tax returns are confidential and the companies don't divulge that information, nobody knows for sure.
Estimate of taxes paid in 2005: $453 million
Including stock option benefit: -$25 million
Estimate of taxes paid in 2001: $74 million
Including stock option benefit: -$7 million
Estimate of taxes paid in 2000: $2.17 billion
Including stock option benefit: -$326 million
Estimate of taxes paid in 2000: $5 billion
Including stock option benefit: -$256 million
Source: SEC 10-K forms and annual reports
Now, with such funding on the decline, "we'll certainly be as strong an advocate as we can be that the government is making a mistake here, and throughout the world I think governments should fund computer science research," Gates said during a question-and-answer session with Maria Klawe, the dean of Princeton University's engineering school.
Former Intel CEO Craig Barrett has made similar pitches during trips to Washington, saying that China and India will pull ahead of the United States without education reform. In an interview with CNET News.com, Barrett said: "The only way to be the most productive society in the world is to lead in new areas of technology" by diverting more tax dollars toward basic research at universities.
At the same time, Intel is among a number of Silicon Valley companies backing a movement that could shave millions of dollars off their tax payments to California, a state that boasts the overall highest tax rates in the country.
In California, where the corporate income tax rate is a flat 8.84 percent, Intel, Oracle, Apple Computer and others are lobbying for a bill that would implement what is known as a "single sales factor" formula for calculating state corporate income tax payments.
Most states give equal weight to three factors--the share of a company's total nationwide investments, payroll and sales that occur in that particular state--when deciding how much tax is owed.
But under the single sales factor formula, they would consider only a company's sales in the state. Translated, that's a boon to manufacturers that make most of their goods in one state but conduct most of their sales elsewhere.
The idea already has caught on in 10 states, including Oregon, where Intel has had operations for 30 years, and Massachusetts, which has one of the highest corporate income tax rates in the nation. Six more states are currently phasing in the new method, but it's far more of a blessing for the companies than for the governments involved, said Mazerov of the Center for Budget and Policy Priorities.
"In virtually all states, it leads to a really substantial revenue loss," Mazerov said, adding that recent estimates from California pegged its potential losses from would-be corporate income tax revenues at $110 million per year. Mazerov's group generally opposes tax cuts and laws that would make it more difficult to raise taxes in the future.
Supporters of the single sales factor formula and other state tax breaks argue that it's a valuable stimulus that encourages building new plants--and creating new jobs--in an economic climate where going overseas is often cheaper.
"Right now it costs an average of $1 billion more to open a leading-edge manufacturing facility in the U.S. versus other countries," said Jennifer Greeson, an Intel spokeswoman. "The biggest difference isn't labor or construction costs, it's taxes."
The chipmaker once cited tax breaks inserted into Arizona's annual budget as one of several reasons it decided last summer to build a $3 billion microprocessor plant there. Arizona's recent adoption of an 80 percent sales factor formula, which stops short of considering only a company's sales in tax calculations but still gives them 80 percent weight, also "created a more positive environment for investment in the state," Greeson said.
State and local incentives valued at $279 billion over 15 years were also a "critical factor" in Texas-based Dell Computer's decision to open a new manufacturing plant in Winston-Salem, N.C., last October, said Colleen Ryan, a company spokeswoman. Dell said it hoped to hire 1,500 employees within five years of the $100 million facility's opening.
"This is a performance-based incentive program. That is, Dell does not receive tax credits unless we meet our job creation targets," Ryan said.
At the time the deal was announced, North Carolina Governor Mike Easley, a Democrat, said the decision made "good economic sense" and estimated it would bring $700 million in net revenue to the state over 20 years.
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