Taxing Corporations

Is a 2011 tax incentive having its intended effect?

For as long as states have been taxing corporate income, one of their challenges has been figuring out how to fairly tax the profits of companies that do business both within and outside their borders. Half a century ago, most states considered three factors: The percentage of a company's property that was located in the state; the percentage of its payroll paid to workers in the state; and the percentage of its sales made in the state.

But that strategy splintered over the years, as states began tweaking their approaches in hopes of gaining an economic development advantage over their neighbors. Florida, for instance, adopted a formula in which it weights the location of a company's sales twice as heavily as the location of its property or payroll.

More recently, a number of states have made a bigger change. They have begun using what's known as a "single sales factor" formula, which ignores how much property a company has in a state and how many workers it employs there. Instead, those states tax a percentage of profit that's based solely on the portion of the company's sales that occur within their borders.

The thinking is that companies are more likely to locate headquarters, factories or other buildings in single sales factor states because doing so won't increase the portion of their profits that gets taxed. Today, at least 26 states either require companies to use the single sales factor or provide some option of doing so, according to the Tax Foundation.

Florida joined the parade in 2011, urged on by business lobbying groups. Amid the global economic downturn, the Legislature passed a law that let companies use the sales-only formula — if they first invest at least $250 million in the state over a two-year period.

"There's been a lot of interest in our membership of companies that would take advantage of this and hopefully grow those jobs that we so desperately need," Jose Gonzalez, a lobbyist for Associated Industries of Florida, told lawmakers at the time.

Five years later, though, it's not clear how much impact the incentive has had. Just five companies have been approved to use the single sales factor: Florida Power & Light parent company NextEra Energy; phosphate miner Mosaic; Publix Super Markets; TECO Energy; and Verizon Communications.

The Florida law doesn't require the companies to identify what specifically they built or bought in order to meet the $250-million threshold. That makes it difficult to determine if any of their spending was stimulated by the incentive. But much of it appears likely to have happened anyway.

For example, on its single sales factor application, Next Era told state officials that it had invested $250.4 million in Florida from mid- 2011 to mid-2013. A spokeswoman said that spending included projects to modernize power plants in Cape Canaveral and Riviera Beach and to install smart meters for customers. Both projects were already under way when the Legislature passed the single sales factor law.

TECO told state officials that it invested $941.6 million combined in 2012 and 2013. A spokeswoman said those investments were "typical capital expenditures" the company makes annually maintaining and improving its power plants and related infrastructure.

Mosaic said it spent $257.9 million between December 2011 and September 2012. A spokesman said the work included upgrading warehouses and control systems, purchasing equipment and developing the Streamsong golf resort in Polk County — a project begun in 2010.

Publix told the state it invested $320.4 million combined in 2012 and 2013, with virtually all of that spending characterized as buying land and buildings or buying equipment such as office furniture and computer systems. A spokeswoman declined to say specifically what that spending included, although Publix's regulatory filings say its capital spending in those two years was primarily driven by building new grocery stores and renovating existing ones.

Verizon said it invested $304.4 million in 2014, which a spokesman said included continuing investments in its wireless and wireline businesses and the construction of a finance operations center that opened in suburban Orlando in 2014 and employs more than 1,000 people. Verizon received roughly $8 million in incentives from the state in exchange for opening the center in Florida.

At least one academic study questions whether the single sales factor helps grow jobs. "There's not much evidence that it matters very much," says David Merriman, an economics professor at the University of Illinois at Chicago who published the study in 2014. "If you want to encourage those companies to create jobs, then you probably want to do it in a much more forthright, transparent manner where you can measure the subsidy and the benefit."

Supporters of the single sales factor, however, say that parsing the value of just one incentive misses the bigger picture — that the singlesales incentive should be considered just one part of the state's overall efforts to create an attractive business climate. Even if the tax formula didn't actually prompt the specific projects, boosters say anything that lowers the companies' taxes frees up more money for them to invest. NextEra, Mosaic, Publix, TECO and Verizon collectively employ tens of thousands of workers in Florida.

"Before the elective single sales factor, Florida's tax law penalized companies like NextEra Energy that invested heavily in the state and employed many Floridians but generated significant income from outside the state," says NextEra spokeswoman Sarah Gatewood.

Because corporate tax filings are confidential, it is difficult to find out how much any of the companies are saving by using the single sales factor formula. Of the five, only TECO would disclose its tax savings: About $100,000 on its 2014 tax bill, which a spokeswoman said equaled less than 1% of TECO's total tax bill.

Some of the other companies could be saving more. State economists who studied the measure when it was being considered by the Legislature estimated that it would cost the state anywhere from $4 million to $14 million per year in lost revenue.

All five of the companies approved to use the single sales factor have been members of Florida Tax- Watch, the Tallahassee-based think tank that was one of the leading supporters of the legislation. Tax- Watch President Dominic Calabro says he still thinks the single sales factor is a good public policy. But he says the $250-million investment requirement has proven beyond the reach of most companies.

"I think the idea is still fundamentally sound. I just think the threshold should be lower," Calabro says. "It does cost some money initially. But over the long haul, you hope that it is an inducement to job creation."