The taxing problems related to Denver's Frontier offer
The city's offer to Republic Airways Holdings -- an effort to keep as many Frontier Airlines jobs in Colorado as possible -- doesn't represent the final word on potential lures. "They're in negotiations," says Tom Clark, the Denver Economic Development Corporation's executive director, "so that means there's wiggle room." Nonetheless, Clark concedes that sweetening the deal won't be easy due in part to delinquent payments that were part of Frontier's bankruptcy filing, plus a "parts tax" and a "software tax" -- with the last two in particular proving only slightly less complex than mastering nuclear physics.
Here's Clark's best effort at explaining the parts tax:
"The parts tax in Colorado has been a bone of contention for all the airlines at DIA going way back to the original United maintenance feeding frenzy of the 1990s. It's a revenue enhancer for the city's general fund, and everybody's always interested in general-fund tax revenue. But the tax is kind of a stand-alone at DIA, and it's very difficult to track as it relates to specific parts.
"There are two types of maintenance operations that go on at an airport," he continues. "One is light maintenance, which I would refer to as an oil change and a lube -- and the other is heavy maintenance. Light maintenance has to happen at every facility, but heavy maintenance can take place anywhere in the system. The jobs are more complex, and they pay more than light maintenance. Now, if you were to craft a piece of legislation for the city that could hold onto the light-maintenance parts tax and segregate it from the heavy maintenance piece, you might have an answer -- but that's a very difficult thing to do. What mechanic can do part of heavy maintenance? Which part goes to light or heavy? And because every other airline is performing some type of light maintenance, if they abolished the parts tax, all the airlines would benefit -- but the cost to the city would be several million dollars, which is a sizable chunk of dough."
Possible options mentioned by Clark include creating a tax holiday for a short period of time or finding another tax that can offer relief without having to run system wide. But he's cagey about saying if they've been suggested. "Those two things may or may not be in the proposal," he allows.
Meanwhile, the aforementioned software tax "is part of a very broad national debate on what constitutes software," Clark says. In the beginning, "we had something called 'the shrink-wrap rule.' If you made software and you could shrink-wrap it and put it on a shelf, you could tax it, because there was a transaction. But technology has outstripped that definition. Now you can go in and essentially rent software online. So can you tax something that's rented? Denver has historically said 'yes' and is pioneering a new piece of tax interpretation. But there is a cost that Frontier, with its reservation system, has to bear -- and that's an additional cost Republic would like to be relieved of."
These aren't the only factors at play, as Clark acknowledges. For instance, Frontier is leasing its facility in Denver from Continental Airlines, "but we believe there's a hangar available at virtually zero occupancy cost in Milwaukee" -- one of two other cities competing for Frontier's Denver jobs (Indianapolis is the other).
Does that mean Denver's done? Clark doesn't think so. He mentions higher property taxes in Midwest cities like Milwaukee and Indianapolis as two reasons why Republic might lean Colorado's way. "And there's also the element of predictability: 'Is what you do today what I can count on five years down the line?'"
Public opinion is a factor as well. "It's a difficult time for any community to put incentives on the table," Clark believes, "because of stretched municipal budgets and cries about the budget, and about corporate welfare and buying jobs." For that reason, he admits, "I honest to God don't know what our chances are."
Well, that clears everything up.