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 (NYSE:CAB), for example, has gotten fat on the government dole, because it will only open one of its theme park-like retail stores in a place where the local government issues development bonds to pay the cost for its construction. Goodyear (NYSE:GT) also drives a hard bargain, having arm-twisted North Carolina's taxpayers to fork over $30 million to upgrade its plants.
Over the years, taxpayers across the country have had to foot the bill for industry heavyweights Dell (NASDAQ:DELL), Google (NYSE:GOOG), and Intel, while New Jersey has become addicted to the pharmaceutical industry, mainlining tens of millions in tax incentives for Bristol-Myers Squibb (NYSE:BMY) and others.
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.
Pfizer (NYSE:PFE) just refunded $1.2 million to Kalamazoo, Mich., because the pharmaceutical is consolidating its operations and cutting jobs as a result of the tough economy. The original agreement required Pfizer to create 23 jobs. Cabela's had to repay both Nebraska and Texas in the past because of lackluster sales, and Home Depot (NYSE:HD) is repaying Wichita, Kan., $2.4 million in tax breaks after it decided not to build a store as it originally planned.
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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