Corporate Headquarters Investment Projects

Preference has two inferred objectives

The Legislature did not state a public policy objective when it passed this preference.

JLARC staff infer two public policy objectives based on the preference's eligibility requirements, the legislative purpose of community empowerment zones (CEZs), and the prime sponsor's testimony to the Legislature:

1. Encourage private sector investment and employment in CEZs.
2. Better compete with Oregon and Idaho for private sector investment.

Qualifying projects must meet specific requirements

Businesses may apply for the deferral at any time before headquarters construction is completed. However, tax liabilities incurred before a business applies do not qualify for the deferral.

To be eligible, the project must meet all of the following requirements:

• Locate within a CEZ. See What are CEZs for more information.
• Operate as a "corporate headquarters," meaning a facility where corporate staff are physically employed and handle most of the company’s regional or national management services. “Company management services” include accounting, information technology, insurance, legal, payroll, personnel, research and development, and tax. Manufacturing, wholesaling, or warehousing facilities do not qualify.
• Invest at least $30 million in qualified building expenses, such as construction or expansion, tangible personal property, and fixtures. Qualifying expenses include planning, installation, and construction labor and services.
• Provide at least 300 permanent, full-time positions after construction. Each qualified employment position must earn at least the state's annual average wage for that year, as determined by the Employment Security Department. The qualified employment positions must be filled by the end of the calendar year following the year in which the project is certified as operationally complete. If a recipient does not meet the requirements for qualified employment positions by the end of the second calendar year following the year in which the project is certified operationally complete, all deferred taxes are immediately due. Washington's average annual wage for calendar year 2016 was $59,073.
• File an annual tax performance report with DOR.

The number of eligible investment projects is limited to two statewide per biennium. Additionally, a CEZ can have only one eligible investment project per biennium.

Projects must meet program requirements for eight years to receive full tax waiver

To receive the full waiver, the project must remain eligible for eight years: the year the project is complete, and for seven succeeding years. Deferred taxes are incrementally waived each year that the project remains eligible at a rate of 12.5 percent per year.

If DOR determines the investment project is no longer eligible at any time during the eight years, a percentage of the deferred tax amount is immediately due, along with interest retroactive to the date of deferral.

Exhibit 1.1: Deferred taxes immediately due based on repayment schedule if DOR determines a project is no longer eligible

Source: JLARC staff analysis of RCW 82.82.040(2)(a).

Preference is time limited, but has no expiration date

The preference took effect July 1, 2009. The Legislature did not set an expiration date, but did establish that no new applications can be submitted after December 31, 2020.

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Six community empowerment zones designated across the state

The Legislature created a targeted approach for community revitalization — now called the Community Empowerment Zone (CEZ) Act — in 1993. The Act is intended to encourage reinvestment in areas with limited employment opportunities, low incomes, a lack of affordable housing, deteriorating infrastructure, and limited community service, job training, or education facilities.

State law allows up to six CEZs statewide.

As required by statute, the Department of Commerce director designated the CEZs before 2004.

Exhibit 2.1: Washington's CEZs are located within six cities or unincorporated areas

Source: JLARC staff map of CEZs listed on DOR website viewed March 30, 2018.

Other tax preferences for CEZs

The Legislature has established other tax preferences to assist with development in community empowerment zones.

Exhibit 2.2: Other Washington tax preferences encourage investment in CEZs

Source: JLARC staff analysis of chapter 82.60 RCW and chapter 82.62 RCW.

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The Legislature did not state a public policy objective when it passed this preference in 2008. This preference was passed before the Legislature required a performance statement for new preferences.

JLARC staff infer two public policy objectives based on the preference's eligibility requirements, the legislative purpose of community empowerment zones (CEZs), and the prime sponsor's testimony to the Legislature. One of the two inferred objectives has been met.

One of two inferred objectives has been met

Inferred objective 1: Encourage private sector investment and employment in community empowerment zones

In committee testimony, the prime sponsor noted that existing incentives for CEZs focused on manufacturing and research and development facilities. He stated that this preference for new or expanding corporate headquarters would be a tool to attract private sector investments with high paying jobs. Others who testified in favor of the preference supported development in the Tacoma and Spokane CEZs.

Department of Revenue tax records indicate the preference has never been used. Since July 1, 2009, only one application has been submitted. The application was withdrawn and the project was not pursued.

The Department of Commerce reports it has provided 10 companies with information about the preference since 2011. Eight of the companies would have been new to the state and two would have been expansions or relocations for companies already in Washington. None applied to use the preference.

Inferred objective 2: Better compete with Oregon and Idaho

In testimony, the prime sponsor noted that Washington was competing in a global economy for large, private sector investment. He stated this preference was a “tool in the toolbox” that “leveled the playing field” with Oregon, which does not have a sales tax, and Idaho, which had a similar preference in law.

The prime sponsor and others indicated that the original bill (which had a $50 million investment threshold and 500 jobs requirement) was nearly an exact replica of an Idaho tax incentive designed to encourage corporate headquarters to locate or remain there. The Idaho incentive, however, had no restrictions on where a qualifying investment could locate.

The Idaho Legislature repealed its Corporate Headquarters Incentive Act in 2008. Staff with Idaho’s Commerce Department report that the legislation was aimed to encourage one specific company to maintain and expand its corporate headquarters in the state. According to Idaho's Commerce staff, the company did not use the incentive, but remained and expanded its operations in Idaho.

No beneficiaries, revenue, or economic impacts from preference

Because the preference has never been used, there are no beneficiaries, revenue, or economic impacts to report.

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Businesses consider many issues when deciding where to locate headquarters

JLARC staff analyzed current national data and academic literature on corporate headquarter relocations. Key issues that businesses consider when selecting locations for new corporate headquarters include:

• The ability to attract and retain current and future workforce talent.
• Reestablishing or building the corporate brand/culture.
• Availability of business services and same industry clusters/specializations.
• Good airport and transportation infrastructure.
• Cutting edge research and higher education facilities nearby.
• Qualitative and cultural amenities that appeal to current and potential employees.

Community empowerment zones (CEZs) are characterized by limited employment opportunities, lower incomes, lack of affordable housing, deteriorating infrastructure, and limited educational and other community services. These locations do not appear to meet many of the criteria corporations value when siting headquarter facilities.

Other states and local governments have used strategies in addition to tax preferences to encourage economic development in distressed areas

Academic researchers have identified several strategies that have been used successfully by other states and local governments to revitalize economically distressed areas. Some of these strategies were used in combination with tax preferences to encourage economic development.

• Invest in training. Both Kentucky and Michigan have offered incentives or grants to businesses to fund customized training programs for their employees. The two states have found the programs to be cost effective in terms of increasing employment and productivity.
  Similarly, South Carolina involved its community and technical colleges in offering specialized training and apprenticeship programs for new businesses that moved into distressed areas. The state's workforce training programs expanded to include 82 participating companies in aerospace, energy, healthcare, information technology, tourism, and transportation.
• Improve infrastructure. South Carolina and the city of Chattanooga, Tennessee, have both used infrastructure improvements as a method to attract new business investments.
  South Carolina expanded its marine terminal capacity and strengthened its inland infrastructure to handle larger shipping vessels at the Port of Charleston.
  The city of Chattanooga invested in fiber optics to turn a formerly distressed area into an innovation zone with the fastest internet in the country. A University of Tennessee study found this investment in infrastructure resulted in 2,800 new jobs in the area between 2011-2015.
• Provide business and technical assistance. The federal government partners with public and private entities in every state to provide assistance to small and medium-sized manufacturing businesses. This is known as the Manufacturing Extension Partnership (MEP) network. The network includes manufacturing experts who provide advice and technical expertise to about 7,000 mostly small manufacturers every year. Research suggests that MEP clients benefit from increased productivity, reduced costs, higher output, and greater employment.
• Offer additional public services. Combining tax credits with social service grants has increased the likelihood for job and productivity improvements in some distressed areas. Research from the original 1993 federal funding for community empowerment zones (CEZs) found that employment in designated zone areas increased by 15 percent by the year 2000. Businesses in these designated areas received employment tax credits (20 percent employment tax credit for the first $15,000 of wages paid to Zone residents) at the same time that the CEZ received social service block grants. The grants were used to fund business assistance programs, youth services, emergency housing, infrastructure investments, and other public services.

If the Legislature wants to encourage economic development in CEZs, it may want to consider using other strategies beyond tax incentives to attract businesses to these areas.

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Community Empowerment Zones - Tax Deferral Program

RCW 82.82.010

Definitions

The definitions in this section apply throughout this chapter unless the context clearly requires otherwise.

(1) "Applicant" means a person applying for a tax deferral under this chapter.

(2) "Corporate headquarters" means a facility or facilities where corporate staff employees are physically employed, and where the majority of the company's management services are handled either on a regional or a national basis. Company management services may include: Accounts receivable and payable, accounting, data processing, distribution management, employee benefit plan, financial and securities accounting, information technology, insurance, legal, merchandising, payroll, personnel, purchasing procurement, planning, reporting and compliance, research and development, tax, treasury, or other headquarters-related services. "Corporate headquarters" does not include a facility or facilities used for manufacturing, wholesaling, or warehousing.

(3) "Department" means the department of revenue.

(4) "Eligible area" means a designated community empowerment zone approved under RCW 43.31C.020. (5)(a) "Eligible investment project" means an investment project in a qualified building or buildings in an eligible area, as defined in subsection (4) of this section, which will have employment at the qualified building or buildings of at least three hundred employees in qualified employment positions, each of whom must earn for the year reported at least the average annual wage for the state for that year as determined by the employment security department.

(b) The lessor or owner of a qualified building or buildings is not eligible for a deferral unless:

(i) The underlying ownership of the building or buildings vests exclusively in the same person; or

(ii)(A) The lessor by written contract agrees to pass the economic benefit of the deferral to the lessee;

(B) The lessee that receives the economic benefit of the deferral agrees in writing with the department to complete the annual survey required under RCW 82.82.020; and

(C) The economic benefit of the deferral passed to the lessee is no less than the amount of tax deferred by the lessor and is evidenced by written documentation of any type of payment, credit, or other financial arrangement between the lessor or owner of the qualified building and the lessee.

(6) "Investment project" means a capital investment of at least thirty million dollars in a qualified building or buildings including tangible personal property and fixtures that will be incorporated as an ingredient or component of such buildings during the course of their construction, and including labor and services rendered in the planning, installation, and construction of the project.

(7) "Manufacture" has the same meaning as provided in RCW 82.04.120.

(8) "Operationally complete" means a date no later than one year from the date the project is issued an occupancy permit by the local permit issuing authority.

(9) "Person" has the same meaning as provided in RCW 82.04.030.

(10) "Qualified building or buildings" means construction of a new structure or structures or expansion of an existing structure or structures to be used for corporate headquarters. If a building is used partly for corporate headquarters and partly for other purposes, the applicable tax deferral is determined by apportionment of the costs of construction under rules adopted by the department.

(11) "Qualified employment position" means a permanent full-time employee employed in the eligible investment project during the entire tax year. The term "entire tax year" means a full-time position that is filled for a period of twelve consecutive months. The term "full-time" means at least thirty-five hours a week, four hundred fifty-five hours a quarter, or one thousand eight hundred twenty hours a year.

(12) "Recipient" means a person receiving a tax deferral under this chapter.

(13) "Warehouse" means a building or structure, or any part thereof, in which goods, wares, or merchandise are received for storage for compensation.

(14) "Wholesale sale" has the same meaning as provided in RCW 82.04.060. [ 2008 c 15 § 1.]