The tax professional occasionally is in a position to negotiate with a state or city taxing jurisdiction to garner tax relief for a client as an incentive to locate a plant or distribution center in that geographic area. In times when construction budgets are high and interstate competition is fierce to attract or retain businesses that are making location decisions, such tax concessions can be significant.

For instance, to encourage a business to build a large distribution center in the area, community leaders might be agreeable to (1) paying for roads, sewer, water, and other improvements through taxpayer bonds, or (2) reducing property taxes by 50 percent for the first 10 years of the center's operations. In most cases, the value of these incentives constitutes gross income to the business under section 118(b)(2).

An incentive-granting community provides the concessions even though the influx of new workers may place a strain on public school facilities and likely necessitate improvements in traffic patters and other infrastructure.

Consider the position of a large employer that has been located in the area for more than 50 years. By how much should it be willing to absorb the tax increases that result when economic development concessions are used to attract new, perhaps temporary, businesses to the area? Should the employer challenge the constitutionality of the grant of such sizable tax breaks to some, but not all, business taxpayers in the jurisdiction?

What should be the rate of 'impact fees' assessed on new developments? Does your analysis change if the new business competes with the longtime resident for sales? For employees? For political power?