Ian/all, most interesting updated article from the Oregonian in regards to INTC's capital equipment plans. Well worth the effort to wade through the entire piece. Jeff
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Intel scenario: $121 million tax cut
According to an Oregonian analysis, single-year savings under Intel's property-tax break plan could reach $26.8 million
Sunday February 14, 1999
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By Elisa Williams of The Oregonian staff
If Intel Corp. secures the property-tax break it wants on $12.5 billion in future projects in Oregon, the world's largest chip-maker could save $121 million within the first 10 years, according to an analysis by The Oregonian.
The savings in a single year under this scenario could range as high as $26.8 million. That's the equivalent of what the state's 10 largest chip companies and suppliers combined paid in property taxes this year. Without the tax break it would pay $151 million in the first 10 years.
Still it's a two-sided deal. Even with tax breaks, Intel's potential tax payments during those 10 years, which would include community service fees to Washington County, could total about $30.4 million on this additional investment alone, according to the analysis.
Intel, Oregon's largest industrial employer, said last month that it planned to file for another property-tax break in Washington County under the state's Strategic Investment Program. Intel holds two SIP contracts, each of which caps the assessed value of chip manufacturing projects in Aloha and Hillsboro at $100 million initially, with 3 percent increases each year thereafter.
Even with these contracts, Intel is the largest property-tax payer in the Silicon Forest.
The company is not expected to make a formal application before the end of the month. It is arguing that this future investment will enable it to retain the 11,000 jobs it has created in Washington County. It could take months for the county to approve or reject the request.
The Oregonian's analysis of Intel's potential savings was based on forecasts compiled with some input from Intel and significant contributions from chip-industry analysts. It used current tax rates, which may change in the future.
Economist Arthur Ayre of Oregon's Economic Development Department calculated the company's potential savings under the scenario provided by The Oregonian. Ayre has analyzed all of the state's SIP contracts in the past and will help oversee Intel's next application.
"This is a scenario, but there are a number of scenarios, and the negotiation process can change these numbers pretty dramatically," said Tom Brian, chairman of the Washington County Board of Commissioners.
A single tax-break contract for the entire $12.5 billion in investment provides the maximum possible savings, Brian said. "They know they're not going to get the maximum possible benefit, and so do we."
After negotiations, the county and Intel could set up a variety of plans, including forming multiple SIP contracts for the $12.5 billion. Such an outcome could substantially reduce Intel's savings.
Cloudy crystal ball
Intel executives argue that calculating a potential tax savings is the equivalent of counting funny money.
Without a tax break, the company, based in Santa Clara, Calif., says it would not consider an investment of this size in Oregon.
In addition, company executives argue that its spending plans frequently shift because of rapid change in the chip industry. Intel makes the chips that run 85 percent of the world's personal computers.
"I wish my crystal ball was better," said Steve Grant, an Intel plant manager who is spearheading Intel's next round of investment in Oregon.
Predicting spending several years into the future is "messy," Grant said. It doesn't take into account many of the alternatives available to the company, such as converting a portion of an existing plant into research and development, or the likelihood that Intel might move equipment from other sites to its Oregon factories.
Indeed, in the past year Intel has done an about-face on several projects. It indefinitely delayed finishing a 400,000-square-foot office building and a chip plant in Hillsboro, and it moved to close a new computer assembly operation in Dupont, Wash.
Intel has held private meetings with Washington County officials to discuss what form its proposal may eventually take.
Grant has said the company wants to avoid tying a tax-break agreement to any specific investment schedule or the promise of new jobs as it has in the past.
Its reasons are complex.
Chip-making techniques are set for sweeping change in the next few years as companies squeeze more and more circuitry into smaller packages. These advances could dramatically alter what chip companies must spend on manufacturing equipment.
Intel came up with its $12.5 billion figure, Grant said, based on a general expectation of how its manufacturing plants will work in the future.
It expects to purchase hundreds of millions of dollars worth of equipment about every 2.5 years. As it installs this equipment, about 50 percent of the old would remain in place. An upgrade to its newest plant in Aloha under this new spending plan could start in several years and range in cost from about $300 million to $400 million. Upgrades to its two plants under development in Hillsboro will likely start at twice that amount and could range as high as $1 billion, according to industry analysts.
While Intel doesn't anticipate adding any new plants or office buildings in Oregon in the near future, it doesn't rule out that possibility. Its master plan for its Ronler Acres campus in Hillsboro allows for at least two more chip plants.
Still, even the best estimates from the top analysts in the industry can prove dead wrong. And the difference in what Intel may spend can have a substantial effect on what it ultimately saves on property taxes.
An additional $1 billion in investment late into the SIP contract, for example in the 2005-2006 tax year, could translate into an additional property-tax savings of about $20 million, not counting a potential increase in the community service fee. That's twice the size of Intel's current property-tax bill of $10.3 million in Washington County.
Intel's two existing contracts, which cover plans for about $3 billion in investment, have saved the company $14.1 million in property taxes, according to county records.
Big slice, big pie
The $12.5 billion Intel plans to spend in Oregon in the next 15 years represents about a quarter of the company's capital spending, industry analysts say.
Intel is the chip industry's largest spender by far. Last year it spent about $3.5 billion on capital equipment. The industry's second-largest investor, International Business Machines Corp., is expected to spend about $1.5 billion in its 1998 fiscal year.
"It ought to be a piece of cake to burn up that money in Oregon," said Dan Hutcheson, a chip-industry market analyst with VLSI Research in San Jose, Calif.
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