Businesses praise equipment tax break, but say it’s not key in creating new jobs – Companies appreciate tax breather

In the three years since Montana businesses had their equipment taxes cut in half, Seeley Lake sawmill Pyramid Mountain Lumber nearly doubled its investment in equipment, helping the mill stay in business and provide some of the best-paying jobs in the community.

By MIKE DENNISON
Tribune Capitol Bureau

http://www.greatfallstribune.com/news/stories/20031229/localnews/128488.html

"It’s truly state-of-the-art," controller Loren Rose says of new sawing equipment purchased in 2001. "We get a whole lot more lumber out of each log."

Yet when asked whether the 50 percent tax cut influenced the decision to buy new equipment, Rose has a simple answer: No.

"The amount of tax we were going to have to pay (on the equipment) was never any consideration," he says. "You do it for other reasons."

Ask the same question of businesses that gained the most from the 2000 reduction in business-equipment taxes, and you’ll often get a similar answer.

Yes, they appreciate the reduced tax rate. But, no, it hasn’t necessarily encouraged them to increase investment or create new jobs – a result promised by promoters of the tax cut.

There’s no doubt that these businesses – mines, timber mills, oil refineries and other manufacturing plants – profited handsomely from the property tax cut.

In the four tax years since the reduction took effect, 18 of Montana’s largest owners of business equipment saved nearly $50 million in taxes, a Tribune examination shows.

The Tribune review also revealed:

* In 1999, the year before the tax cut took effect, these 18 businesses paid $19 million in property taxes on their business equipment. This year, the same businesses will pay $15.7 million.

Because of higher mill levies and a substantial increase in property value at three companies, the aggregate, annual tax bill for these 18 firms is only a few million dollars less than they paid before the tax cut. However, if the tax rate had not been cut, they would have paid $49 million more the past four years — assuming mill levies and property values are the same as they are today.

* At the same time, taxes on area homeowners and other types of property increased. Mill levies increased an average of 25 percent the past four years in taxing districts that includes the plants, while taxable value of homes and commercial real estate generally increased.

* Some businesses did invest substantially in new equipment, increasing the value of the taxed equipment and, in some cases, increasing their overall tax bill. However, many actually scaled back on equipment or had it depreciate to a lower level, further lowering their taxes.

* The change in numbers of jobs at these businesses had no particular pattern. Some plants increased their work force in the past three years; some stayed the same; others reduced jobs.

While most plant managers who spoke to the Tribune say the tax cut hasn’t greatly influenced their company’s investment in equipment or jobs, they say it hasn’t hurt, either.

Henry Ricklefs, vice president of manufacturing products for Plum Creek Timber, says lower equipment taxes help his company stay competitive and continue to be a major employer in northwestern Montana.

"We happen to be in the tightest timber markets in North America," he says. "The fact that our property taxes have been brought to a more reasonable level is certainly welcome to us and important to us."

Plum Creek has saved almost $3 million on its equipment taxes at its five Flathead County mills during the past four tax years. It employs nearly 1,000 people in the area.

The company also invested substantial funds in new equipment at the five plants in recent years.

Taxes on that equipment "is not a huge part of the equation, but it’s still important to consider the impact of the capital (investment) on your property taxes," Ricklefs says.

At the CHS Inc. (formerly Cenex) oil refinery in Laurel, manager Pat Kimmet says the tax cut has been helpful in convincing corporate managers of the national company to invest more funds in the Montana plant.

"I am fighting for capital all the time," he says. "Where I can show a better rate of return, I get the money. And certainly the lower property taxes help."

CHS has increased the value of its taxable equipment by some $20 million since the tax cut was enacted in Montana, and plans to spend an additional $100 million at the plant over the next two years, Kimmet says.

The plant employs 250 people and has saved $3.4 million on property taxes the past four years.

Still, several managers at plants that have expanded – or contracted – say they would have made those decisions regardless of any change in equipment property taxes.

At Pyramid Mountain Lumber, managers decided several years ago to reinvest in new equipment. They laid out a four-year plan to modernize the mill and bought the equipment in 1999 and 2001.

"That really had nothing to do with the business-equipment tax and legislation," says Rose.

The sawmill employs about 140 people, and has been slowly but steadily increasing its work force since almost closing in 2000.

The Stillwater platinum and palladium mine near Big Timber and Absarokee has undergone a huge expansion since 1999, adding almost $100 million in equipment and increasing its tax bill, despite the 2000 rate reduction. It employs 1,540 people.

John Pearson, director of investor relations for Stillwater, says the $5 million in tax savings because of the rate cut is appreciated. But the expansion would have happened regardless, he says.

"It wasn’t the main driver behind the expansion," Pearson says. "The main driver is really the metal prices."

Platinum is trading at $850 an ounce and has been routinely hitting new highs on the market.

The Smurfit-Stone Container plant in Frenchtown, which manufactures material for cardboard boxes, has been one of the largest single beneficiaries of the equipment tax cut, saving $6 million the past four tax years.

Yet the plant scaled back its operations during that time, reducing its workforce by about 100 people, to its current level of 500.

Bob Boschee, the plant’s general manager, says there’s been a decline in demand for the packaging material produced by Smurfit-Stone, due partly to the slowdown in the U.S. economy.

"Because of market conditions, our mill has been reorganized to produce less than we did prior to that time," he says. "The impact of the tax reduction is somewhat overshadowed by the effect (of the economy)."

Also, the plant that’s seen the biggest single savings from the 2000 tax cut – Advanced Silicon Materials near Butte – is fairly indifferent about the reduction.

The ASiMI plant, which produces silicon for use in manufacturing computer components, has increased its taxable equipment by more than $100 million the past four years and saved some $16 million on its tax bill during that time.

But a unique financial arrangement for the plant makes part of this "savings" next to meaningless for ASiMI.

When the plant came to Butte in the late 1990s, local government created a special tax-finance district. Sixty percent of the plant’s huge property-tax bill was pledged to pay for bonds that paid for public infrastructure needed at the plant. The arrangement was based on the old equipment tax rate.

While ASiMI’s tax bill technically fell by half in 2000, the company still must pay 60 percent of the tax bill based on the old rate to pay off the bonds.

The tax cut will help the plant in the long run on its tax bill, but for now, it hasn’t changed ASiMI’s plans for gradual expansion at the Butte facility, says chief financial officer Bill Perrill.

"We’re continuing to build out the facility here," he says. "We’re not going anywhere. We’ve got a lot of concrete sitting here. … We’re in for the long haul."

The chief sponsor of the 2000 tax cut – state Sen. Mike Taylor, R-Rollins – says it’s that "long haul" that people should keep in mind when evaluating the effects of the cut.

Businesses with a lot of equipment are businesses that produce products and pay good wages, and those are the types of businesses that need to be encouraged to be in Montana, he says.

The lower tax is part of that encouragement, and probably has been a factor in Montana’s slightly improved economy and job growth the past year, Taylor says.

"Economic development, as I’ve said before, is a 10- to 12-year plan," he says. "(The tax cut) is not a panacea. I never said it was the ultimate thing. But if you take it as part of the puzzle, it has helped."

Skeptics of this policy, however, say it’s clear the promise of the huge tax cut has been a false promise.

Since its inception three years ago, it has not delivered widespread investment or a big jump in jobs, they say – but it has provided big windfalls to big companies and foisted that tax burden on others, like homeowners.

"What we know with absolute certainty is that Montana taxpayers – Main Street Montana, homeowners and renters – have had to pick up $50 million over the last four years to subsidize tax cuts to our biggest businesses, just so that we can stay even with the support we’re giving to education and other public services," says Sen. Jon Ellingson, D-Missoula.

"Business was going to invest more in Montana and produce jobs. They’ve gotten the benefit of the bargain; the citizens of Montana have been left holding the bag."