Potential big employers catch breaks in Idaho

BOISE – After decades of trying to keep the state’s tax system simple and stable, Idaho leapt into the world of business tax incentives this year, passing five major pieces of legislation designed to lure or retain businesses and jobs.

Backers of the new approach, including Gov. Dirk Kempthorne, say Idaho has to offer targeted incentives to get the economic development it needs – and if it doesn’t, other states will beat it to the punch.

“It’s a little different policy than what we’re used to,” said Randy Nelson, head of Associated Taxpayers of Idaho, a business-funded tax watchdog group. “We’ve sort of started realizing what’s going on around us … sort of a competitive thing between the states almost. It’s just a different ballgame out there.”

Critics of the new approach say tax incentives alone aren’t the most important factor in luring or retaining jobs, and focusing on them could detract from more important concerns – like improving the labor pool through investing in higher education.

“Economic development incentives are important, but they’re not the most important item in terms of where a company locates its home office or where it grows or moves,” said Ernie Goss, a Creighton University economist and an expert on economic development. “No. 1 typically is labor quality and labor availability – those are much more important.”

Since Idaho was hit by a sharp economic downturn just after it had made major tax cuts in 2001, the state’s budget has been hurting, and higher education has seen significant cutbacks. The state’s recovering now, but programs continue to be eliminated and staff cut as institutions such as the University of Idaho and North Idaho College work their way back from the lean times.

Economist Judy Brown of the Idaho Center on Budget and Tax Policy in Moscow, Idaho, said, “There’s a broad array of categories over which you could be supporting economic development, and we’re focusing on one very small piece which studies show to be a minor one.”

Brown, who opposed some of the tax legislation that passed this year, said she’s particularly concerned about property tax breaks that some of this year’s legislation will hand out in the name of economic development. “Property tax abatements do not pay for themselves – the economic literature is clear on this,” she said. “Newcomers get a tax break, and existing residents have to pay for economic growth.”

Gov. Dirk Kempthorne’s major tax-incentive package this year, which is aimed at large corporations that bring in 500 or more high-paying jobs, avoids that problem by having the state reimburse local governments for lost property taxes.

But that approach is missing from two other major tax bills that passed. The Small Employer Incentive Act lets local county commissioners grant property tax breaks at the expense of other taxpayers in the county, and a tax cap bill sought by Micron Technology caps its property taxes once they reach a certain level, leaving its neighbors to make up the difference.

Also passed before the Legislature adjourned last month were breaks from corporate income and sales taxes, in a variety of forms.

Senate President Pro Tem Bob Geddes, R-Soda Springs, said it was important to grant the two major tax breaks that Micron sought this year – the Boise-based computer chip manufacturing firm is Idaho’s largest private employer.

“The last thing we want them to do is build a plant in Singapore,” he said.

House Speaker Bruce Newcomb said, “Arizona, Utah, Illinois and Virginia – they all have equal or better tax incentives for business or high-tech businesses to come to their state. The name of the game currently is you’ve got to compete with other states.”

When the Senate debated a research and development sales tax exemption that could yield Micron as much as $7 million a year at state expense, Senate Tax Chairman Hal Bunderson, R-Meridian, said, “We can drive them from us, or we can partner with them so that they can effectively compete, and then we’ll have a friend for life.”

He added, “Yes, there’s a cost, but there is another side of the ledger.”

A few senators objected, but they were easily outvoted. “We keep chipping away at the tax base of this state,” said Sen. Joe Stegner, R-Lewiston. “It’s a $7 million hit to the budget. That is a transfer of $7 million from the pockets of taxpayers to the pockets of Micron shareholders, and I think that is very poor policy.”

Sen. Monty Pearce, R-New Plymouth, supported the bill, but noted, “We all need to recognize that we are carrying water for large corporations.” Soon, he said, lawmakers would go home and face ordinary people. “I think we should ask ourselves, what did we do for them?”

In fact, the move toward big new tax incentives for businesses came in a year when there was an outcry for homeowner property tax relief, and eight bills were introduced with that aim.

However, all eight of them were killed in favor of a study over the coming summer.

The governor’s major incentive package, touted as a way to attract Fortune 500 companies with high-paying jobs to move their headquarters to Idaho, was nicknamed the “Albertson’s bill,” because the Boise-based grocery chain is expected to be the first to take advantage of it as it considers consolidating its operations.

The small employer bill was added at the insistence of lawmakers as a companion bill; it gives scaled-down breaks to employers who add as few as 10 new jobs paying at least $40,000 a year.

Two other bills were specifically proposed and lobbied for by Micron.

The fifth measure offers a sales tax exemption for alternate energy producers. Ridgeline Energy, a firm that’s proposing a major wind-energy development in eastern Idaho, applauded the bill in press releases and public statements from its PR firm.

“House Bill 110 levels the playing field and allows us to be competitive,” Ridgeline Vice President Rich Rayhill said after the bill passed the Legislature. “Without the bill, we were afraid Idaho electric companies that are adding wind to their portfolios would be forced to buy wind power generated in a neighboring state. We have the resource here, and this allows us to use it to our advantage.”

Although Albertson’s hasn’t been a prominent donor to legislative campaigns, giving just $5,690 to 11 candidates in 2002, Micron is one of the largest legislative campaign contributors. It’s given nearly $100,000 since 2000, including $42,778 in 2004, $29,800 in 2002 and $21,200 in 2000.

Ridgeline Energy made no contributions through 2004, according to Idaho Secretary of State’s records, and Rayhill had given just $100.

Brown said she fears that Idaho is just increasing its ongoing budget problems by granting more tax breaks to businesses, though backers of the breaks argue they’ll generate more than they cost by adding jobs and vitality to the state’s economy.

Kevin Klowden, a research economist with the Milken Institute in California, said, “You need more than tax breaks. Tax breaks do help.”

But he said without investments into human capital – such as producing more graduates with high-level degrees – and other infrastructure, the breaks can’t do the job.

“If you just attract a company based on the financial incentives, then as soon as somebody else offers better financial incentives, you run the risk of losing them,” Klowden said.

Nelson said he sees the targeted tax breaks as something of a gamble. “Do you do this and take the chance that they’ll stay and invest, or do you not do it, and they may leave?” he asked.

Newcomb, the House speaker, said, “I don’t really like the game of states competing for these big businesses, but that’s the game these days. If you’re not going to compete as a state, you’re going to go backward.”