During prosperous times, giving tax breaks to businesses sounds like a good idea. When business goes bust, however, it can cost the companies receiving them dearly.
Local governments who bait the hook with lures of tax breaks are really engaging in a zero-sum game. They pit themselves against each other, and the companies on the receiving end understand this. Some businesses play on the fear of missing out on ratables (property tax income) particularly well.
Outdoor gear retailer Cabela's
Over the years, taxpayers across the country have had to foot the bill for industry heavyweights Dell
Yet where the boom economy may have made some of the provisions of those agreements seem like afterthoughts, investors ought to be paying far closer attention to them today, specifically to those deals containing clawback provisions.
A clawback allows the locality to recoup the tax breaks it gave the company if it doesn't meet the performance standards originally agreed to, such as providing a certain number of jobs or generating a certain amount of sales.
Dell might find it has to repay North Carolina the $279 million it received in tax breaks to get out of the manufacturing side of the computer business. But it's unclear whether new buyers could assume the tax breaks Dell got, or whether they would even want to commit to the job-creation mandates those breaks entail.
With retailers everywhere finding sales particularly pinched these days, investors would be wise to keep an eye out for the sharp cuts in profits future clawback demands might make.
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Fool contributor Rich Duprey owns shares of Intel and Goodyear but does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.