Apple-World’s Most Valuable Company-Scores Tax Break from Arizona School Board

| Editorial

Apple landed a tax break from Gilbert Public Schools governing board on Monday. According to AZCentral, the five-member board voted unanimously in favor of the deal, which Apple was seeking as an incentive to operate a major manufacturing plant in the area.

According to the report, the board was divided as recently as November 12th, when two members opposed the deal. With the support of local residents and businesses who want Apple to come to the area, those board members changed their mind and voted for it on Monday.

Apple Tax Squeeze

For the most part, I'm a fan of Apple. That's no surprise, of course, but I mention it here because I have grave concerns about the habit of state and local governments and school boards to give fabulously wealthy corporations—including Apple, the world's most valuable company—tax breaks.

We've seen it again and again, in part because those corporations have become adept at playing state and local governments against one another in order to get the best deal they can. That's a rational approach for the companies, and it's obvious that companies like Apple bring quality jobs and good salaries to an area, but it's a race to the bottom that needs to stop.

This is especially true with property taxes, which most U.S. states use to fund schools. All those quality jobs and high salaries bring with them more students for those schools, and when local districts give away the farm, the results are often fewer resources for the schools.

This is the case with the Manor School District outside of Austin, where Samsung won a great tax deal to bring a major manufacturing plant to the area. The results have been crowded classrooms and fewer resources, and this is all too common. Apple has also won significant tax breaks in Austin itself.

At a time when wealth is being concentrated into ever-fewer hands, rich companies like Apple should do the right thing and pay their fair share into the local tax base. That these deals are legal—that state and local governments are willing to cut their own feet out from under them—is irrelevant.

The reality is that it's not good for the families of the workers, and that makes it bad for the companies. Underfunded school districts will make it harder to recruit top workers, especially with high-skill jobs. No one wins, except the shareholders of the companies getting the deals.

But even there, local tax deals are little more than a line item—if that—on the balance sheets of companies as profitable as Apple.

So, Apple: do the right thing. Pay your fair share.

Note that I am a tiny AAPL shareholder.

Image made with help from Shutterstock.

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Comments

Bosco (Brad Hutchings)

Thought experiment… Jurisdiction A property taxes for a new facility would cost Apple $2M/year. Jurisdiction B property taxes for a new facility would cost Apple $5M/year. Is it right for Apple to factor that difference in when deciding where to locate a new facility?

JustCause

This is the free market. It will go to the lowest bidder that can deliver a qualified product. In this case if the area didn’t cave the corporation would just go somewhere where they could get the tax break. And as a publicly traded company Apple has to do what’s right for the company & shareholders. If you don’t like it change the rules but don’t blame Apple. Just look how a single investor like Icahn can jerk around a highly profitable and successful company,  trying to force them to act in investors term interest but not in a way that’s best for the company’s long-term (and long term investors).  Blame the game not the player.

skipaq

It is a free market. Some states are business friendly. Other states do everything to discourage business development. The same can be said about counties and cities. The only way to change these rules would be to federalize the whole process which is likely unconstitutional and certainly scary. The system we have results in businesses locating where they are wanted. The restrictive locations get what they want: no business.

MacFrogger

OK - As a radical lib socialist (except when I’m not) who was probably also born in Kenya (except for the fact that I wasn’t), I’m on Bryan’s side on this one.  With all due respect to my fellow commenters, Apple has never played by the same “game” as others.  Yes, they are in biz to maximize profits, but one of the reasons why I buy Apple products is they don’t build crap (my 2005 MacBook Pro is still up upgradable to Mavericks, even though I haven’t done it yet), they’ve given me incredible service and done free repairs long after my extended warranty had expired, and criticize them for labor practices or environmental practices without comparing them to the “standard practices” of every other OEM and I’ll call you out on your hypocrisy.  They do have higher standards than others, and like Bryan, I’m not happy with stiffing the local school district.

I lived in the Bay Area for many many years, and I’ll just say it: the output of most Calif schools suck.  Why?  Because with the exception of some very wealthy school districts, Calif schools are starved for funding because of Prop 13.  In my experience, most of the workers in the Valley are imported from other states and other countries.  Apple, of all companies, should recognize, appreciate, indeed dare I say it - INVEST - in the education of the sons and daughters of the employees without hesitation.  Not only because its the right thing to do, but also because it is in their very best interest to do so.

Skipaq said: “The only way to change these rules would be to federalize the whole process which is likely unconstitutional and certainly scary.”  C’mon, that’s not the only option here. There are good corporate citizens and there are bad corporate citizens.  What’s next, Apple proudly holding food drives for their starving employees like Walmart?

http://www.thenation.com/blog/177241/cleveland-walmart-holds-food-drive-its-own-employees

Jak Keyser 1

  Whoa Nellie here, Bryan and posters. I live in Arizona and have read in depth articles by our largest newspaper in the State, the Arizona Republic - quotes follow. This is about the site designated as a Foreign Trade Zone by the Federal government.

  “Foreign-trade zones are federal entities designed to facilitate international trade. They support manufacturing, warehousing and distribution operations. Retail trade within such zones is not allowed.
  “The federal government offers several economic incentives to reduce the cost of merchandise manufactured or processed in such zones. Duties may be waived or deferred, and tariffs may be reduced.
  ” In addition, Arizona law allows properties in foreign trade zones to be classified differently from those not in trade zones for property tax purposes. In some cases, that can result in property-tax reductions of 75 to 80 percent.
  “Officials calculated, however, that the deal actually would bring an additional $2.5 million a year to the Gilbert district.
  “That’s because Apple plans to pour about $1 billion into the vacant 1.3 million-square-foot factory. (my note: and also because the factory has been sitting idle and would likely remain so for a long time, if not for this deal)
  “Thus, even though the tax assessment rate would be lower, that rate would be applied to a much higher valuation.”
. . .
  “Mayor Butler told The Republic that the Apple plant would not bring new students to the Gilbert district, but Teddy Dumlao, the district’s finance director, said the plant’s estimated 700 permanent jobs could bring new families to the area . . . with an average wage not less than $45,000. (taken from an earlier paragraph in article: ” Heavy retrofitting of the plant would require 1,300 construction workers.”
  “The overall impact of more homes in the area could produce a slight reduction in school property-tax bills for district residents, Dumlao said.”
. . .
  “Brady said there was a lot of misunderstanding about the foreign-trade zone and what its potential tax breaks mean.
  “It gets misconstrued that this is some kind of a subsidy program or whatever,” Brady said. “This is a federal program that helps achieve the goal that really is shared by the entire country, where we are trying to bring back manufacturing jobs into the United States. We’re trying to level the playing field with Southeast Asia, with China and Mexico and places like that where we’ve lost so many jobs.”
  “Responding to Smith’s comments on Tuesday that the FTZ designation may be unfair to “mom and pop” small businesses, Brady noted that even small companies can take advantage of such zones.
  “As long as you’re in the manufacturing import-export business, you can apply for this program. That’s the purpose of the program, to encourage that type of activity,” Brady said.”
. . .
  ““Additional revenue with the foreign-trade zone and with the major corporation that will come in means a decrease in property taxes for our businesses and residential areas,” Tram said. “This is really a win-win for everybody.”
. . .
  “Borrowing a phrase from Mesa Mayor Scott Smith, Somers said, “We are picking a winner. We’re picking Arizona. We’re picking the United States. We are creating manufacturing jobs in the United States that were overseas or potentially overseas. This is picking us as a winner.”
. . .
  “The Arizona Commerce Authority wooed Apple Inc. to Mesa with the assistance of a $10million grant, the largest sum ever distributed by the group’s business-development fund, according to documents released Tuesday.”

Back to my commenting:
  Arizona has a school funding equalization program. New revenues received by the Gilbert school district will be offset by not receiving that amount of revenues from the State of Arizona Equalization fund. That means all districts in the state will share a portion of the increased revenue, including the Gilbert district, a benefit for education for the whole state.

  This is much different than a give-away by a local entity. It’s actually quite a net gain. And the rest of the State will benefit. In fact the US will benefit by getting the GT factory operating in the US instead of the possibility that it could have gone overseas.
And that is a good deal more than you thought you’d know about this story.
  Credit goes to writers Karen Schmidt and Gary Nelson, and Peter Corbett who covered the story in-depth—all of The Republic Newspaper and azCentral.com (owned by The Republic).

skipaq

@MacFrogger, my point is valid. In order to change the rules so that incentives aren’t given to corporations to move to a location, it would need to be federally mandated. But even the federal government plays this game as in Solindra. That money wasted could have gone to education. Even with that taking place it is debatable as to education being improved.

I grew up a democrat and voted that way up to and including Carter. Almost voted for Clinton. Today I am more conservative with Libertarian leanings. That doesn’t make one opposed to education. It does make me opposed to greater government answers.

Terrin

State governments should not be treated as, “Free Markets.” The fact of matter is the federal government controls most of how a State can earn income (e.g. says a State cannot force retailers to collect sales tax), and often dictates what services must be provided (e.g. free health care to illegal immigrants). Like with internet sales tax, the federal government should put an end to this non-sense of forcing States to cut their own throats to compete for business. For businesses there should be a set property tax that applies nationwide. Forum shopping by doing away with property taxes hurts the country, it does not help it.

With all that said, it is not Apple’s fault it is taking advantage of a broken system to gain a tax break. It did not write the laws. If you can pay a dollar as opposed to two, why would you not do it?

jbruni

The problem with most school districts isn’t the lack of funding; it is in mismanaging the funding they receive. Instead of building multi-million dollar office suites for district-level employees, perhaps that funding should be routed to the schools where there are actual students.

Bosco (Brad Hutchings)

Speaking of mismanaged school districts, it sure would be fun to have a follow-up on the LAUSD iPad program. Talk about a complete cluster-frak! It almost ended with the superintendent resigning, but strangely got a contract extension to 2016. Oh, and still no iPads in student hands. I’m pretty sure someone predicted a mess in the comments and got savaged for the predictuon.

Bryan Chaffin

Hi Black_Dog. I’m no MBA, but I’ve been following and studying Apple for a long time. The company has the best run supply chain in the electronics industry, thanks largely to Tim Cook’s leadership in operations starting in the late 1990s (though that continues with the full team he built intervening years). I remember when Apple first moved ahead of Dell—which was then the operations king—in inventory-on-hand and inventory turnover. At one point, Apple got to as little as 24 hours of inventory-on-hand, which was just crazy at the time, unheard of.

Part of that supply chain efficiency—and I personally believe that Tim Cook’s management of the last several iPhone and iPad transitions is one of the most undervalued and under-reported success stories in modern business—comes from the way Apple uses its cash on hand to buy up supplies of critical components, buy and/or refurbish factories, buy equipment, secure favorable leases, buy all of the shipping and logistics, and of course get the best possible price on anything and everything.

All of these things start from Apple’s cash position, though that cash position long ago outgrew the demands of Apple’s operational needs. This is a well-understood aspect of Apple’s supply chain management, and there are tons of stories out there on the topic.

As for supplier terms, I’ve read accounts about businesses who couldn’t hack Apple’s terms. I’ve talked to suppliers who described very difficult working relationships with Apple with terms that left them on the hook for things few other companies would have been able to negotiate. I have personally encountered enough such stories to know that it’s hard being an Apple supplier.

Nowhere in this piece did I say, imply, or even think that Apple is somehow “bad” because of this.

I’m not afraid of criticizing Apple—I’ve done so on numerous occasions. I’ve said that [UR”=http://www.macobserver.com/tmo/article/apple-worlds-most-valuable-company-scores-tax-break-from-arizona-school-boa”]Apple and all large corporations need to pay their share of local taxes[/URL]. I criticized Apple’s pursuit of journalist sources 10ish years ago, and the fact that Apple pulled Wiley’s For Dummies books out of the Apple Store in retaliation for iCon, an unauthorized biography of Steve Jobs (all books are gone from Apple Stores now, but that’s another issue).

There are many things that I have been critical of concerning Apple, though they are vastly outweighed by the things I think Apple gets right.

But, the premise of this piece is:

1.) It’s hard to be an Apple supplier—this is not something I am the first to note.

2.) Being an Apple supplier sometimes comes with great risks but usually offers great rewards.

3.) This is so because Apple is better at business (or at least operations, but probably business) than all of the other companies.

4.) I laid out a possible scenario that could have led to GTAT’s bankruptcy.

If anyone wants to read criticism of Apple or capitalism into that, I can’t stop them. It wasn’t what I was thinking or intending while writing the piece. It’s not something I think. I wanted to offer context, to explain how a company that had received more than half a billion dollars from Apple could still go under. Looking for and providing context is what I do as a journalist.

The reality is that Apple is the king of operations, and when you deal with a king, there is going to be some roadkill. That is business.

My intent with this piece was to offer context on what it’s like to be an Apple supplier using GTAT’s bankruptcy to illustrate that being one of those suppliers is hard. Living up to Apple’s standards is hard. Dealing with Apple’s terms can be, and usually is, hard. This is, again, business.

Since I wrote this piece (i.e. on Tuesday), I bought a few shares of $GTAT as a pure gamble. I’ve also been long on $AAPL forever, though my holdings are scant.

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