Bill would ensure tax incentives remain in place

Posted on April 16, 2007

States rely on a steady stream of new company investment for both higher tax revenues and more jobs, so one federal appeals court decision against investment tax credits gave Tennessee officials the shivers. Congress hopes to protect future investment tax credits with clear state authority through a bill called the Economic Development Act of 2007. U.S. Sen. Lamar Alexander, R-Tenn., is a leading co-sponsor. Alexander, a former Tennessee governor, said tax incentives helped bring major companies like Nissan, Saturn and Dell to the state. The concern began with a ruling by the U.S. Court of Appeals for the Sixth Circuit in September 2004 which declared Ohio's investment tax credit unconstitutional. Tennessee is in that judicial circuit. Ohio appealed and the U.S. Supreme Court overturned the decision last year. Tennessee's attorney general reviewed the Ohio arguments and decision and determined it did not jeopardize the primary investment tax incentives in the state. However, state revenue commissioner Reagan Farrsaid state officials still would like Congress to clarify the issue to avoid future court conflicts. "Our preference is we would like to see Congress and not the courts set the policy for something like that," Farr said. "Congress has authority to set commerce between the states. If Congress says it is alright for states to exercise their sovereign right to enact incentives to attract business to their state, then that's the final say." Among the state's more popular business tax credits, according to Farr: -A jobs creation tax credit applied to the state franchise and excise tax. It can reduce a company's state corporate tax liability. -An industrial machinery credit to encourage the purchase and use of industrial machinery in the state. It also is applied against the state franchise and excise tax. Industrial machinery is exempt from the sales and use tax in the state. -A headquarters facility incentive: if a company invests at least $50 million in a new headquarters facility in the state, it gets a sales tax credit related to the sales and use tax paid to construct the facility. The credits time period is either one time for investments under $100 million or spread over perhaps three to 20 years for investments of more than $100 million. The state is barred by statute from discussing the amount of investment tax credits given to any specific new company, but the general formula is public information so it's possible to estimate the credits based on how much a company is investing and the number of jobs to be created. Next in Tennessee's incentives pipeline is to propose to the General Assembly that high-tech companies with large server and data centers be put into the same class as manufacturing facilities so they can get a reduced rate on electricity. Also, the high-tech companies' purchases would be treated like industrial machinery purchases by being exempt from the sales and use tax, Farr said. The state hopes the General Assembly passes the high-tech company benefits this year. Since Ohio's investment tax credits initially were endangered, one of its senators, George Voinovich, a Republican, took the lead on the bill. Alexander joined in the effort. Labor, corporate and government groups united behind the legislation. Among Tennessee-related companies endorsing the bill were: Alcoa Inc., Eastman Kodak, FedEx and HCA Inc. Also, on board was the Tennessee Chamber of Commerce & Industry. Other supporters were the National Governors Association, U.S. Conference of Mayors, National League of Cities, National Association of Counties and the National Association of Manufacturers. The bill likely could win passage in this Congress if members can focus on it long enough despite no current adverse court decision.