The politics of tech's tax breaks

Do incentives used to lure tech companies keep money from public schools--and thus hurt U.S. efforts to stay competitive?

Symantec received what must have been an unpleasant surprise at tax time this year: A $1 billion bill from the federal government.

The security software company revealed last month that the IRS alleged it underpriced intellectual property related to its Veritas acquisition that was licensed to its Irish subsidiary for tax reasons. For its part, Symantec says it paid all appropriate taxes in 2003 and 2004 and plans an appeal.

Every individual and business, of course, tries to pay the minimum amount of taxes legally required. But technology companies that try to minimize their tax burden sometimes draw accusations of hypocrisy from liberal advocacy groups and academics--mostly because the same companies want more government spending on education and research.

Symantec, for instance, is a founding member of a trade association that lobbies for more federal research funding and more government spending to teach children cybersecurity. And when Cisco Systems recently hosted President Bush in Silicon Valley, the president and company executives called for better math and science education. Last fall, Microsoft Chairman Bill Gates did the same.

Yet under one method of reckoning corporate taxes, in one well-known and isolated example, neither Microsoft nor Cisco paid anything to Uncle Sam or state tax collectors in 2000.

Nobody is saying that any technology company has done anything improper. Rather, critics suggest, businesses should voluntarily write fatter checks to tax collectors.

"So many of these high-tech CEOs are out there beating the drums about the fact that the decline in education in the U.S is...hurting international competitiveness," said Michael Mazerov, a tax specialist at the Center for Budget and Policy Priorities, an advocacy group that generally opposes tax cuts. "At the same time, these same companies are seeking and getting huge tax breaks from state and local governments that are negatively affecting the ability of these governments to provide educational services."

The tech industry isn't alone. Government auditors analyzing IRS data in 2004 estimated that between 1996 and 2000, 61.3 percent of large U.S. corporations with at least $50 million in gross receipts reported zero tax liability mostly because of legally permissible deductions. (Similarly, a self-employed individual who makes no money because of no profits may be able to escape paying federal income taxes that year.)

Another favorite complaint of critics is tax breaks that state and local governments dangle to lure valued businesses. A deal between Intel and Rio Rancho, N.M., gave the chipmaker an estimated $645 million in tax breaks, for instance. Intel has also saved hundreds of millions of dollars through tax breaks designed to lure companies into building large manufacturing plants in Oregon and Arizona.

"In the long run these are costly because the state has less money in order to invest in schools and infrastructure and the kinds of things that would be conducive to creating a powerful labor force in the future," said Dave Wells, who teaches in Arizona State University's Interdisciplinary Studies Program.

This view is hardly universal. For one thing, executives have a legal responsibility to shareholders to maximize income within the bounds of the law. Also, nobody would argue that an individual who takes advantage of a legal tax break--such as the adoption tax credit--would be a hypocrite for griping about potholes in roads or poor teachers in schools.

Critics of corporations miss the point, says Lew Rockwell, president of the free-market Mises Institute. "There are a lot of premises in that argument" about companies not paying enough, Rockwell said. "One is that the more government spending, the better the education. If anything, the more money spent on public education, the worse the education. Certainly funding goes in the opposite direction of SAT scores."

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