California’s most valuable company – Apple Inc. – has been taking flak lately from the halls of Congress to the capitals of Europe over reports that the consumer electronics giant manages its business to minimize the corporate income taxes it pays to the U.S. and foreign governments.
But you’re not likely to hear too many complaints from California politicians about the company’s contribution to the state and local tax base – or the economy. The taxes Apple pays represent a huge chunk of the state budget, and new numbers show just how big a role it plays in the economic life of the Silicon Valley and especially the company’s home town of Cupertino.
Last month a US Senate report highlighted how Apple had used offshore subsidiaries in Ireland and elsewhere to avoid paying taxes on billions of dollars in profits it earns from international sales. The company will have to pay US taxes on those profits when and if it brings that money back to the states. But for now Apple is sitting on a massive pile of cash that is not taxed by any country.
Apple’s accountants have tried something similar to reduce the company’s California tax bill, using a division based in Reno to manage Apple’s company investment fund. That tactic allows Apple to avoid California’s corporate income tax on the money it earns from those investments. Nevada has no income tax.
But a recent report by the Citizens for Tax Justice, a group that lobbies for higher business taxes, said Apple paid an average of 8 percent of its profits in state corporate income taxes over three years. That ranked the firm fifth among 265 major companies whose books the groups scrutinized, and tops among California-based firms. No exact figures are available by state, but it appears that Apple paid more than half a billion dollars in California taxes in 2010.
Apple is planning a major expansion of its headquarters in Cupertino, a town of about 60,000 people between San Jose and Palo Alto in the heart of the Silicon Valley. As part of its application to the city for the new building, the company released a study that documented the firm’s impact on the local economy and the budgets of the cities and the county where it does most of its business.
Apple has 16,000 full-time employees in Cupertino, accounting for a remarkable 40 percent of the city’s job base. The company’s payroll in Cupertino has grown by an average of 18 percent per year over the past five years. But even projecting growth at a more conservative 10 percent a year, Apple says it will add another 7,300 local jobs by 2016. That would give the company more than 23,000 workers in Cupertino by the time the new corporate complex is completed.
Those 16,000 employees in 2012 collectively earned an estimated $2 billion. The company spent another $4.6 billion buying products and services from more than 700 businesses in Cupertino, Santa Clara and Sunnyvale alone.
It’s no surprise that Apple is the single largest taxpayer to the city of Cupertino, paying an estimated $9.2 million in the current fiscal year, or about 18 percent of the city’s general fund. Apple’s operations last year generated $6.5 million in sales and use taxes for the city, fully 45 percent of Cupertino’s collections – and that’s after accounting for an agreement through which the city rebates to Apple half the sales tax revenue the company generates.
Another $14 million in tax revenue on Apple’s sales went to the regional transportation authority. And the company paid $25 million in property taxes, which are split among the city, Santa Clara County, a library district, fire district and the local schools.
The company’s role in the broader economy of the Silicon Valley is immeasurable. But with nearly $7 billion in direct payments for payroll and local purchases, it’s fair to say that Apple is like rocket fuel in the local economic engine.
That story is good news and bad for Cupertino, and a cautionary tale for the rest of the state. For the city, Apple’s presence there and its expansion plans pretty much guarantee a rosy short-term future. But if the company ever comes on hard times, things could get very bad very quickly for Cupertino. It is, in many respects, a company town.
For California, Apple is a reminder that policymakers need to do what they can to encourage economic growth, and to ensure that as companies move from an entrepreneur’s idea to a row of laptops in a business park office to a massive corporate campus, the incentives are aligned for them to stay in California. Apple’s evolution also demonstrates that for all the focus in the media and politics on manufacturing employment, the best jobs of the 21st century will probably come from inventing, designing and selling new products, not piecing together widgets on a factory floor.
An Apple Inc. comes along only once or twice in a generation, so not many California cities can hope to base their futures on such an economic powerhouse.
But from the bio-tech centers of Orange County, San Diego and San Francisco, or the graphic arts hotbeds of Los Angeles, or the Internet 2.0 bastions throughout the Bay Area, another company will likely emerge to one day take Apple’s place at the top of the corporate heap. Hundreds if not thousands of smaller firms, meanwhile, will be born to support those larger players. If the state and local governments don’t screw it up.
So let the debate about corporate taxes proceed. But keep in mind that before there can be corporate taxes, there have to be corporate profits.
Daniel Weintraub has covered public policy in California for 25 years. He is editor of the California Health Report at www.calhealthreport.org