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According to a summary from the State’s Legislative Council Service, IRBs are essentially bonds issued by a city to help a company acquire property, build a facility and/or purchase equipment for a new operation. This usually means the company can now access funds cheaper than through a traditional bank; and because the city is technically making the purchases, most spending is tax-exempt. The company pays the city back over time, just like a traditional loan.
So why would a city want to help a company avoid paying taxes? Because the city is betting that the new taxes paid over the life of the bonds by the company’s new employees and new vendors will be more than what the city gave up to close the deal.
Think of it this way: Right now a vacant plot of land only generates $100 a year in property taxes. A company wants to build a new factory that costs $1 million, and it will hire 20 workers at $50,000 each per year to run it. Without the factory the land would generate just $1,000 in property taxes over 10 years. That’s the baseline the city will receive if nothing happens. If the gross receipts tax rate is five percent, the city is giving up $50,000 in taxes from the construction. But over 10 years, the new employees would be paid $10,000,000, and a lot of it would be spent in local stores where the city gets a cut through gross receipts taxes. If those employees spent just half of their new income locally, the city would receive $50,000 in new sales taxes each year for as long as the factory is open. That generates $500,000 in new taxes for the city—much more than the $1,000 it would have received had nothing happened.
In New Mexico state law also requires that any company using IRBs in cities like Albuquerque also provide their employees with health insurance, which right now seems like a pretty good idea.
But what if the company fails? Turns out the city is protected. Most of these deals include special terms called “clawbacks” that require the company to pay back any taxes it avoided if the company fails to meet the economic output or job hirings it promised. When Phillips closed its Albuquerque semiconductor factory, it paid the city $2.2 million in clawback penalties. The City Council used that to seed a new fund to help at-risk children that, today, still funds health clinics, mentors and community school programs across the city. [ ]