November 18, 2010
When Intel Corp. announced last month that it plans to spend $8 billion upgrading and expanding plants in Oregon and Arizona, some in Colorado Springs wondered why those expansions weren’t coming here, where the company shut down a plant in 2007.
The semiconductor giant operated a 1,000-employee plant in Colorado Springs for nearly eight years before closing it three years ago after selling the line of chips and moving production to Taiwan.
In mid-October, Intel announced plans to upgrade and retrofit four plants in Chandler, Ariz., and Hillsboro, Ore., and build a third plant in Hillsboro to make the latest generation of its flagship microprocessors, the brains of personal computers.
The projects are expected to create up to 8,000 construction jobs and up to 1,000 permanent production jobs on top of the thousands of workers already employed at the two sites.
It turns out that Colorado Springs was not considered in Intel’s latest round of expansions, said Bill MacKenzie, a company spokesman in Oregon. Nor were any sites besides Intel’s existing locations in Arizona and Oregon,
“In this round, we looked only at upgrading our existing fabs (semiconductor manufacturing plants), so the decision came down to Arizona and Oregon,” MacKenzie said. “But we are not ruling out any U.S. expansion at new sites.”
The reason Intel has plants in those states — and not Colorado — is due in part to favorable tax policies there that don’t exist in this state. MacKenzie noted that “market forces” played the primary role in the company’s decision to close its Springs plant.
“I’m not saying that tax issues were irrelevant, but they weren’t the determining factor,” MacKenzie said. “Every investment decision is a separate decision and we look at the whole scope. We are always looking at investment opportunities, and we would have to take a look again at all the relevant factors” if the company were to consider anywhere in Colorado. Intel still employs 400 at a design center in Fort Collins and another facility in Longmont.
Intel’s decision to upgrade and expand its Oregon operations were heavily influenced by two tax policies that significantly reduce its potential tax burden in the state, MacKenzie said.
Those policies include basing state corporate income tax only on how much of its production is sold in Oregon. Because the company sells most of its products outside that state, most income generated by the plant is not subject to Oregon’s corporate income tax.
Oregon also caps the value of manufacturing equipment subject to local property taxes at $100 million, which exempts billions of dollars in equipment that makes up the bulk of the cost of building or retrofitting a semiconductor plant, MacKenzie said. That is covered under a series of agreements first negotiated when Intel expanded into Oregon in the mid-1990s; the latest agreement covers $25 billion in investments over a 15-year period ending in 2020, he said.
“These policies were a critical factor in deciding to grow here and continue growing here,” MacKenzie said.
In Arizona, Intel’s plant is located in a foreign trade zone, which gives the company a series of breaks on some taxes and U.S. Customs duties because such zones are treated as if they are outside the country, said Jason Bagley, a company spokesman in Arizona. The state also agreed to reduce the property tax burden of Intel and other capital-intensive businesses by 80 percent, though the company still pays a “sizeable” property tax bill, he said.
Arizona also bases its corporate income tax only on how much of a company’s production is sold within the state. After the state adopted the so-called “single-factor” corporate income tax in 2005, Intel has spent $3 billion upgrading and expanding its Arizona operations, Bagley said.
Arizona also beefed up its research-and-development tax credit two years ago to be more competitive with California, which Bagley said was a “tremendous incentive to invest in Arizona.”
Intel spends $450 million a year on research and development in Arizona and is spending another $100 million to convert its first chip plant there to a research operation that will create 200 permanent jobs and another 300 construction jobs, he said.
“These are the kind of jobs any community wants to grow. All three (tax) pieces are absolutely essential to attracting high-wage jobs and getting capital-intensive businesses to invest in Arizona,” Bagley said. “When you are looking at attracting a capital-intensive business to your state, you have to address the disincentives to that investment. When you treat a capital-intensive business like an office building, you have created a significant barrier for investment.”
Colorado’s tax policies are similar to both Arizona and Oregon in two ways: basing corporate income tax on a single factor and giving a less generous credit for research-and-development spending.
But Colorado can’t compete with either state on how it taxes manufacturing equipment. Although El Paso County and the city of Colorado Springs give breaks on the personal property taxes that businesses pay on such equipment, such breaks are no longer available from school districts.
When Intel acquired the Garden of the Gods Road plant in 2000, the city, county and Colorado Springs School District 11 all agreed to rebate much of the personal property tax Intel paid on its manufacturing equipment. State law at the time required any rebates be offset by increased state aid. But in 2003, legislators reduced the reimbursements during a budget crisis.
The rebates depended on the state reimbursements to school districts. While the amount of the rebate wasn’t all that significant, the change eroded the “predictability and stability” of Colorado’s business climate and ultimately contributed to the company’s decision to shut down its Springs operation, said Danny Tomlinson, a longtime Denver lobbyist who worked for Intel when it operated the local plant.
“Capital flees from risk. Intel officials told me that ‘as long as we know the rules and they don’t change, we can do our due diligence and make decisions on whether to be here.’ It comes down to predictability and stability,” Tomlinson said.
That was about the same time Intel shelved plans to buy 700 acres near the Colorado Springs Airport where it planned a major expansion of its local manufacturing operations, citing weak business conditions. Without a larger operation here, Intel had little incentive to keep the aging manufacturing plant here open when the chip industry hit a slowdown in 2007, said Mike Kazmierski, CEO of the Colorado Springs Regional Economic Development Corp.
“We knew Intel was important and did everything we could to keep them here, but other communities also felt they were important and did more,” Kazmierski said. “The fact that (Intel) left indicates they probably won’t consider Colorado again unless something radically changes. Colorado is not very friendly compared to other states for what they do. They have to keep their costs competitive because they are competing globally.”
Kazmierski said he hopes state officials some day will address the barrier Colorado’s personal property tax, which is levied only on businesses, creates for industries that are looking to make major investments and hire hundreds or thousands of high-paid workers.
But that’s not likely any time soon. State Senate Majority Leader John Morse, D-Colorado Springs, said the likelihood of phasing out the tax in the near future and replacing it with state aid to school districts and local governments, as Kazmierski has recommended, is “zero” amid a budget crisis that has forced hundreds of millions of dollars in cuts in the state’s budget for the past several years.
The Colorado Legislative Council estimated in 2009 that legislation that would have phased out the tax over 40 years beginning next year would have cut state revenue by up to $350 million; legislation to do so has failed several times, including last year.
“Everybody hates the business personal property tax, but how do you get rid of it?” Morse said. “Unless you replace the revenue, you would end up laying off teachers,” since school districts collect the bulk of the tax, he said.
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