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Stupid Tax Breaks: Oshkosh Defense Saves Millions By Doing What Comes Naturally

With unemployment running at more than 14 percent and its car industry still in shock, Michigan has one of the most battered economies in the U.S.

So the state government has been creating special zones where companies promising to create jobs get breaks on property and sales taxes, and in some cases subsidies and infrastructure support. It makes sense -- except when it doesn't.

Consider the case of Oshkosh Defense, part of the Oshkosh Corporation (OSK) of Wisconsin. Oshkosh makes fire trucks and cement mixers as well as vehicles for the U.S. military and some overseas customers. The company's non-military division has suffered in the last three years due to weakening demand, which led to a loss in 2009. The military division, however, has stayed strong, and two recent contract victories provide reason to believe that 2010 will be much better:

  • Last year the company became the only provider of a new, lighter and more maneuverable Mine Resistant Ambush Protected (MRAP) vehicle for use in Afghanistan. These protect against the mines and Improvised Explosive Devices (IED) that caused most of the casualties in Iraq and Afghanistan. The first-generation MRAPs were large, heavy and moved better on roads. The harsher terrain of Afghanistan required a new vehicle, the MRAP ATV. Oshkosh has won more than $4 billion in contracts to build these.
  • In February, the Army confirmed that Oshkosh would supplant BAE Systems (BAE:LSE) to win a $3 billion-dollar Army truck contract to build the Family of Medium Tactical Vehicles (FMTV).
As part of the contract, Oshkosh Defense agreed to establish a technical center in Michigan that will eventually employ up to 200 people. The office will be located on the site of the closed Detroit Arsenal Tank Plant. The Army office that manages vehicle acquisition is located in the area, so it makes sense for Oshkosh to have people nearby.

And there's the rub. The state gave Oshkosh a $6.4 million tax credit to help build the facility. This is part of a "renaissance zone" program to revitalize older, existing industrial sites. Oshkosh won't pay taxes until 2011 at the earliest and then it might well be at a reduced rate.

The question is: Does Oshkosh need the help? The company would have needed an office, anyway, to manage both the MRAP-ATV and the FMTV contracts. So it appears that Michigan is essentially paying some of Oshkosh's costs. Considering that the state is running a $1 billion budget deficit (after $1 billion in spending cuts), it's hard to justify giving Oshkosh tax breaks to do something it was already planning to do.

With the money Oshkosh is earning from these lucrative Army contracts, it could have paid its property taxes and built its own offices. Thanks to Michigan, it doesn't have to.