May 1, 2006 4:00 AM PDT
The politics of tech's tax breaks
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But not everyone shared such a rosy outlook. Before the plant even opened, the North Carolina Institute of Constitutional Law filed a class-action suit against the state and local governments, accusing their multimillion-dollar tax breaks of violating provisions in the U.S. Constitution that guard against discrimination "in favor of in-state economic activity and against interstate commerce."
A state superior court judge in Raleigh, N.C., heard oral arguments from Dell and the state attorney general on April 26 and is expected to rule this week on whether that case will proceed.
The practice has also generated enough controversy to attract the attention of the U.S. Supreme Court. The constitutionality of Ohio's investment tax credit, which can be used to offset a certain percentage of new machinery and equipment purchased by manufacturers, was the focus of a case called Daimler-Chrysler v. Cuno. The justices heard arguments in March and are expected to issue a ruling by the end of June.
"This case has the potential to sort of take some of the tax competition weapons out of the arsenal of all states," said Mazerov, the Center for Budget and Policy Priorities researcher. "That would be a good thing. The competition would still continue, but it would be constrained somewhat by this decision."
Until then, local citizens will continue effectively subsidizing city services for big business, advocates of higher taxes claim.
"The water, the sewage, the lights on the streets, just all of the different infrastructures that a city and state have to provide, that is paid for somewhere," said Meizhu Lui, executive director of the Boston-based advocacy group United for a Fair Economy, which supports higher personal and corporate income taxes. "So what they offer in terms of jobs is really far less in terms of what they get back."
The difficult problem of calculating taxes
There's one nearly intractable problem in trying to figure out how much a company paid in taxes, though: Nobody knows what really happens. Only the IRS and the company itself do, and neither routinely makes that information public.
That means anyone trying to estimate a company's effective tax rate has to rely on filings with the Securities and Exchange Commission, which use different accounting rules. (In accounting circles, this is a well-known phenomenon called the "book-tax difference.")
CNET News.com estimated tax rates and figures based on a formula recommended by accounting experts we interviewed. That formula suggested that Adobe, Apple, Cisco, eBay, Microsoft and Yahoo all may have been able to skip at least one year without paying any taxes.
One reason for that can be found in the research and development tax credit, which is designed to encourage investment in new technologies. It has let companies shave millions of dollars off of what they owe the IRS.
Major technology trade associations and companies have been lobbying to make that tax credit permanent--a move endorsed by President Bush in this year's State of the Union address. They're hopeful that Congress will at least extend the credit, which technically expired on Dec. 31, 2005, sooner rather than later.
"It's the number one tax issue that we work on," said Stephanie Childs, vice president of tax policy for the Information Technology Association of America, whose members include Dell, IBM, Intel, Microsoft, eBay and Yahoo.
Other tax rate reductions, particularly in the case of technology companies, often occur through a tax benefit claimed as a result of employees exercising stock options awarded to them as compensation. Between 2000 and 2005, the 10 technology companies analyzed by CNET News.com apparently racked up $27.5 billion in stock option tax benefits--more than half of the $53.2 billion they ultimately paid in federal, state and foreign taxes during that time.
Accounting experts say this is entirely appropriate. "There is nothing remotely questionable...regarding either the legality or ethical propriety of deducting stock option exercises," said Richard Sansing, an accounting professor at Dartmouth College's Tuck School of Business.
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