The Level Playing Field:

Who Really Has the Advantage?

By Alan M. Robinson

Direct Communications Group

Private sector motor and air carriers are offered a wide range of tax breaks making the differences in tax liability less than the competitors would indicate. Furthermore, states have granted private sector competitors significant investment subsidies not which are not available to the Postal Service.  The size of these subsidies depends upon the size of the operation that private sector competitors propose in a particular state.   As such, the most generous subsidies would unlikely be available to Postal Service partners including drop shipment specialists such as Parcel Direct and Paxis and Postal Service transportation contractors including Emery and star route operators.  The most generous subsidies are also unlikely available to smaller private sector competitors providing air transportation services such as Airborne and Emery and trucking competitors offering less-than-truckload transportation whose distribution terminals are unlikely to be located on airport property.

The remainder of this article provides examples of five areas of state law and policy that reduce the value of the advantages that the Postal Service may receive by being part of the federal government. These are:

2)       <![endif]> Targeted tax breaks;

         3)       Access to government owned capital assets;

4)       Development subsidies; and

5)       Direct subsidies.

General Tax Provisions – How air and Motor Carriers are special.

While the private sector competitors of the Postal Service are subject to state tax law, their existence as common motor and air carriers provide tax benefits that are not available to businesses in other industries. States have created certain tax provisions that encourage air and motor common carriers to purchase, operate and domicile equipment within an individual state. These tax provisions affect nearly all portions of state tax code and provide reductions in sales, use and property taxes.  

For example, several states exempt aircraft that is owned or leased by a common carrier from sales and use taxes. [1] States also exempt aircraft component parts and accessories from sales taxes if the company is engaged primarily in interstate commerce. [2] States may also exempt services that repair airplanes from state sales taxes to encourage firms repairing airplanes to locate in their states. [3] Many states also provide tax credits or reimbursement of money paid for jet fuel used in aircraft engaged primarily in interstate commerce. A few states, including Tennessee, even exempt jet fuel from sales and use taxes levied in the state. [4] Other states have placed a cap on the amount of fuel tax an interstate carrier has to pay to the state. [5]

States also offer benefits for motor carriers.  States exempt common carriers from paying sales and use taxes for operating equipment including tractors, trailers, straight trucks and delivery vans. [6] Sales tax exemptions exist in some states for the purchase of repair services, repair parts, accessories, and lubricants.   Finally, some states grant tax credits for fuel that is used in vehicles engaged in interstate commerce. 

Targeted Tax Breaks

States see enormous job-creation advantages from having the major private-sector competitors to the Postal Service operate their large air and motor hubs in their states.  States compete for these facilities.  The competition increases with the size of the facility proposed. The competitive process results in states offering substantial specific tax incentives to United Parcel Service, FedEx and others to build new or expand existing facilities. Good examples of the scope of targeted tax breaks are provided by the states of Kentucky, where United Parcel Service expanded its primary air hub, and North Carolina, where FedEx opened a regional hub.  In both states, the legislature enacted laws to attract the specific project.  Both states also enacted legislation that allow any carrier to take advantage of the benefits offered by their state as long as the company meets certain business criteria.  In both states, the criteria are such, that only UPS or FedEx could possibly receive the benefits. [7]   

UPS’ Hub 2000 is one of the largest physical projects ever undertaken by the parcel carrier, and Kentucky expected the project to create a little over six thousand new. [8]   Kentucky provided UPS with several economic incentives to obtain the expansion.  The Kentucky Economic Development Finance Authority provided UPS with $35 million dollars in corporate income tax credits over a ten-year period as an economic incentive.  In return, UPS agreed to expand its existing facilities to 2.5 million square feet and hire a minimum of 6,016 new employees in order to obtain the credits. [9]   Kentucky also passed other legislation that reduced United Parcel Service’s tax burden. The special legislation included a reduction in the annual cap on the sales tax on jet fuel from $4 million to $1 million dollars. [10]   

North Carolina’s incentives package attracted FedEx to open a new hub in Greensboro, North Carolina.  FedEx received economic incentives from both ocal and state governments.  “As put together by the airport authority, the $79.8 million in tax breaks going to FedEx include $38.6 million in tax forgiveness by Guilford County.” [11]     Guilford county’s tax incentives also include over $6 million in property tax exemptions on aircraft located at the hub. [12]   The state will offer the remaining $41.2 million in tax incentives to the corporation over a twenty year period. [13]  This includes an estimated $21 million dollars in sales tax exemptions for construction materials, aircraft repair parts, lubricants, and other supplies used in hub operations.  FedEx will also receive a $10.4 million reduction in corporate income tax. [14]  

Access to government owned capital assets  and Cut rate financing

Both FedEx and United Parcel Service lease facilities built by public airport authorities, with these facilities sometimes built specifically for their use. While access to government owned capital assets once only applied to facilities on airport property, recently airports have begun financing off-airport facilities for these companies.  Leasing government built and owned property provides significant advantages over the private carriers building the facilities themselves or leasing privately built facilities. These advantages include access to public bond financing, access to leases from public entities not subject to local property taxes, and opportunities for below market facility lease costs.  .

Airport authorities often sell bonds to finance the building of facilities that will be exclusively used by FedEx and UPS.  As long-term leases back these bonds that guarantees the repayment of the bonds, states and airport authorities can issue these bonds at favorable interest rates.  In some instances, the airport authority may issue tax-exempt bonds to finance air cargo facilities used by Postal Service Competitors.

 Nearly all airports are publicly owned, and therefore are exempt from county and state property taxes. [15]   The tax exemptions directly benefit the private company leasing airport built property because the lease payments do not need to cover property tax that a private developer would pay.  FedEx received this type of benefit from North Carolina.   Guilford County will lose an average $1.9 million dollars in property taxes because FedEx facilities and equipment are owned by the tax-exempt airport. “More than 70 percent of that subsidy, $27.6 million of Guildford’s total $38.6 million over 20 year, would come from a property-tax break on FedEx’s $230 million dollar cargo-handling complex.” [16]   FedEx will also save an estimated $8.1 million dollars in land rent from Piedmont Triad International Airport. [17]   The FedEx property tax savings may be increased by $4.1 million if the exemption includes the $72 million dollar conveyor system being built in FedEx’s Greensboro facility. [18]    The benefit would come from the airport building the conveyor system with tax-exempt bond revenue, and then rent the equipment back to FedEx as a part of the facility lease. [19]

Finally, by leasing facilities built by government authorities, the Postal Service’s competitors lease property from entities that are not subject to market disciplines.  As such, the airport authorities need not earn a market return on their investment in cargo facilities.  The leases need only cover the financing costs. 

Development subsidies

Individual states provide the Postal Service’s competitors with a wide variety of benefits to encourage them to locate within their state. While the benefits vary among the states, there are a number of investment benefits common to almost every state.  First, almost all states offer employee training assistance.  Usually states grant corporations tax credits for training.  The size of the grant depends on the number of new jobs created in the state.  Second, some states reimburse part of the money that is spent to train new full time employees. North Carolina provided $10 million dollars for an employee training-program for new FedEx employees. [20] States grant even larger benefits if the investment is made in an enterprise or economic development zones.  Benefits for locating within enterprise zones include grants for building or leasing a facility, sales and use tax credits for machinery, and special enterprise zone related tax incentives. A third development incentive offered by states involve offering companies access to loans at below market interest rates.  States have different programs depending upon the size of the project.  Each program has specific criteria that the companies must meet in order to gain access to the low interest rate loans.  

Direct subsidies

States have set up authorities and commission with the responsibility to help corporations establish themselves within the particular state. There authority are often public-private partnerships with membership including government employees, contractors, local business people, real estate developers and others who have an interest in luring large-scale projects in the area where they conduct business.  Kentucky created such a partnership to lure UPS to Louisville. In order to ensure that UPS created over 6,000 new jobs the partnership helped establish the Metropolitan Scholars Program.  This program allows students to attend college classes on a modified schedule.  This allows the students to work for UPS at night.  The state and UPS split the student’s tuition allowing UPS employees to attend college tuition free.  The state has even built special dorms for UPS employees enrolled in the program. [21]     In the first year of the program, 1988, Kentucky set aside $1 million to cover tuition costs. [22]   Kentucky set aside $2 million in 1999. [23] Kentucky also appropriated the funds to relocate homeowners in order to expand and expedite the cargo-hub project.  The 2000 General Assembly appropriated $20 million to complete the relocations. [24]

Conclusion

This overview of the advantages that states can grant the Postal Service’s competitors indicates that access to these advantages is widespread.  The competition among states for the cargo hubs of FedEx and United Parcel Service have continually increased the incentives that the states and localities have offered UPS and FedEx.  In many ways, the competition among the states for UPS and FedEx hubs has been similar to the competition between cities seeking professional sports teams looking for new stadiums.  The city that offers the greatest subsidy gets the team.

This article barely scrapes the surface in uncovering the benefits and subsidies states have granted the Postal Service’s competitors as they expanded their operations.  To fully appreciate the size of these benefits and subsidies an in depth analysis of the public involvement in the infrastructure expansion of the Postal Service’s competitors is required.

The size of the incentive packages and subsidies have grown so large that they must be included in comparisons of the advantages that the Postal Service may have over its private sector competitors.   As the private sector receives its subsidies primarily for investments in its transportation and delivery networks, the comparison of Postal Service advantages needs to be made separately for its networks providing retail, sortation, and delivery services.

The Postal Service’s strategy encouraging drop-shipping and contracting for transportation services may have worsened its competitive disadvantage.  It is unlikely that the consolidators feeding mail into the Postal Service’s delivery networks and its transportation contractors have received or would be likely to receive benefits and subsidies comparable to that received by the large direct competitors putting them and the Postal Service at a disadvantage.  In particular, few of these Postal partners are likely to  locate their operations on airport property. 

The size of these incentive packages and subsidies raise questions about the continuing competitiveness of smaller air cargo, air express, and less-than-truckload carriers.  These firms do not have access to equivalent incentive packages and subsidies as United Parcel Service and FedEx. In particular, regional less-than-truckload carriers face the greatest disadvantages.  Regional less-than-truckload carriers directly compete with the ground and deferred air services offered by United Parcel Service and FedEx but are unlikely to have sortation terminals located on airport property as these firms do.  As such, less-than-truckload carriers are likely to have higher financing and real estate development costs than either UPS or FedEx

Finally, the size of these incentive packages and subsidies may subject American carriers to questions about whether state subsidies provide them an unfair advantage in their home market and in international services. The incentive packages and subsidies could affect current litigation and administrative procedures in Canada and Europe where state subsidy issues are under review.