From Site Selection magazine, November 2003 U.S. LEGISLATIVE UPDATE

Still In a Pickle State legislatures dance between deficits and development. by ADAM BRUNS D epending on who's talking, corporations are either hiding profits in tax shelters while states give away the farm with incentives, or, corporations are paying the lion's share of state taxes and continue to prop up struggling state economies. Either way, each of the 50 states are taking aggressive measures to get themselves through an economic rough patch that has displayed no favoritism. Together, the states face a deficit of $27 billion in 2003, and a projected figure more than doubling that in 2004.         "There is a lot of pressure to take away incentives," says Ed Outlaw of consultancy TaxBreak LLC, "so a lot of them are more targeted, more specific to industries, with more clawbacks." State and Military Portfolios Get a Closer Look Almost every state with a military base has devoted a special task force with twin aims: make the case for preserving the base during the next round of BRAC closings in 2005, and, barring that, make plans for what to do next with the installation.         In the meantime – in a twist on the corporate attraction and retention scenario – states are also taking a closer look at their own real estate portfolios, says Peter Brooks, principal, Ernst & Young Real Estate Advisory Services.         “A lot of states are gearing up to do this,” he says. In fact, Massachusetts, Virginia and Florida have RFPs out on the street. Meanwhile, Illinois, Michigan, Pennsylvania and Maryland are planning to generate them in the near future.         “It’s so exactly like our private clients - a multi-divisional large corporate entity is very comparable to a state,” says Brooks. “All have the problems of each agency wanting to focus primarily on what it does for a living and only secondarily focus on real estate. Insofar as they do focus on real estate, they’re usually quite willing to take care of it themselves, without help from the home office. That sounds a lot like some of our corporate clients.”         In many states, up to half of the portfolio can be taken up by the university system, with agency office space, transportation, corrections and parks and recreation taking up the rest of the managed space. That diversity of mission puts some consolidation moves off limits, but not all. And the traditional urge to dispose of under-utilized properties as quickly as possible is now being stymied by a drive to put some of those properties to an economic development use. Upstate New York and the northwest region of Florida are just two examples.         “Rather than selling the property, you could find some sort of public/private joint venture that would build something that would not have just a one-time sale price benefit to the state, but an ongoing economic benefit,” says Brooks. He observes that new governors encountering staggering deficits have a bit more flexibility to try new things, and to do so with a sense of urgency. That includes “this one little corner of the world called their real estate portfolio.”         “We’ve universally gotten a positive response,” he says of numerous meetings with state officials around the country. “A lot of heads nodding up and down, saying ‘We really are going to do something.’”         "We believe accountability is a fundamentally essential and appropriate feature in any arm's length transaction," says Jay Biggins, managing director, national incentives for Stadtmauer Bailkin Biggins. "Sophisticated companies know that public officials have fiduciary responsibilities, and generally do not seek business terms that are not realistic and or defensible (if they know). The key is to negotiate commercially reasonable terms that accommodate the flexibility that companies need to manage through the economic and market uncertainties that they shoulder every day, and to avoid harsh or inappropriate penalties when companies are acting in good faith."         Some say the faith is not being kept. A July 2003 report from the Multistate Tax Commission claimed that state corporate income tax revenues were reduced by more than a third in 2001, to $35.4 billion, largely as a result of tax sheltering, but partly due to tax breaks. However, a rebuttal from the Council on State Taxation (COST) claimed that corporate income taxes only accounted for 9 percent of the total of $391 billion that corporations paid out to states in 2001.         A follow-up report prepared for COST by Ernst & Young found that the total will come to nearly $400 billion in 2003, with over 38 percent of that total coming from business property taxes. One standout statistic: over the past 20 years, non-corporate business income has grown from 7.1 percent to 13.1 percent, largely on the shoulders of new forms of company organization like S-corporations, which allow the paying of taxes at a lower individual rate. But since 2000, business taxes paid out to states have grown by 9 percent, while individual taxes have grown by a mere 2 percent. From 2002 to 2003, corporate income taxes increased by 18 percent, while property taxes increased by 5.1 percent.         Standing out even further: the Fortune 1000 pay a staggering 90 percent of utility sales taxes and over 59 percent of insurance premium taxes. A state-by-state version of the COST report is forthcoming in November 2003.         So it's no wonder both state legislators and the corporations they woo are taking a careful look at how they do business. That includes new developments in training and education, highlighted in Site Selection's annual legislative update, with full contact information, updated incentives charts and notes on all 50 states, the District of Columbia and Puerto Rico. Continue to: State-by-state Legislative Review

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