Tax credits and incentives have long been a tool for bolstering revenue for state economies. In this episode, we are joined by Jason Skrinak, founder of Pivot Strategic Consulting in Harrisburg, Pa., and a member of the PICPA Fiscal Responsibility Task Force, to discuss how credits and incentives are used in Pennsylvania, the scrutiny they will be under in a post-COVID business environment, and the steps being taken by states to ensure these stimuli are working as intended.

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By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

Podcast Transcript

Tax credits and incentives have long been considered a key element of the bolstering of state economies, especially in the state of Pennsylvania. Today, we will explore several aspects of these economic tools, including industries that have received major credits in the Keystone State, why incentives may be under increased scrutiny in a post-COVID fiscal environment and the effect that remote working may have on planning going forward. To discuss all this, we have Jason Skrinak, founder of Pivot Strategic Consulting in Harrisburg and a member of the PICPA Fiscal Responsibility Task Force.

Can you give us a bit of a background on credits and incentives, and how they're used to promote growth in a state particularly in Pennsylvania?

[Skrinak] Credits and incentives are used very often by states and also localities. These states’ credits and incentive programs are looking to attract new business. They're looking to attract, well, actually retain current businesses, make sure that they stay in Pennsylvania. They're also looking for current businesses to expand their footprint here in Pennsylvania. They're competing with many other states looking to do the same thing. They're looking to pull businesses outside PA, looking to attract them to their states. I'm a state and local tax guy. So, my view of credits and incentives is skewed more toward the tax perspective. What states are trying to do on localities, they're trying to attract new businesses into their states. Having those businesses come into their state or via locality will offer them a chance to impose business taxes on those businesses.

That's one stream of revenue that they're going to be able to obtain by expanding the business in their jurisdiction. Secondly, new business is going to be buying products, that's another revenue stream. They're going to increase the revenues that current businesses are already located within the locality. They're going to be providing additional revenues to those businesses. They're also going to be increasing the tax base from a sales and use tax perspective. All their items that they're buying to run the business, there's going to be sales and use tax on those items as well. That's another increase in revenue base. And the main increase states are looking for, is they're looking for more and better jobs within their state.

Having better-paying jobs, better jobs, more jobs is directly going to tie itself in increasing the personal income tax base for a state. The main revenue draw for most states is personal income tax. If they can get more jobs in the state, better-paying jobs in the state, it's a win-win for the state. They may give some credits and incentives on the short term, but the goal is to have a better long-term approach to increasing tax revenues.

Many aspects of business, or even life obviously, have been affected by COVID-19. Why do you think credits and incentives will be under scrutiny going forward in a post-COVID 19 economy?

[Skrinak] It's interesting looking at it. I kind of view COVID from a tax perspective as a trickle-down effect. Most folks are looking at, "All right, how does this impact me for federal tax purposes?" Maybe, “How does it impact me for state income tax purposes?" Maybe you get granular and say, "How does it impact me from a sales and use tax perspective?" One of the last ones for the latter is credits and incentives. States are going to look to increase revenues however they can. They are also going to be looking to reduce expenditures wherever they can. One of the items I definitely see states looking at are credits and incentives. They're going to be looking at making sure, okay, we had this credit and incentive package for company A, company A promised to come in here and invest $5 million in a new facility.

They promised to increase jobs by 300 jobs within the state. They provide a package with regard to credits and incentives under that broad spectrum. However, with COVID, things are rapidly changing. Decisions from a business perspective have changed. That capital infusion, the new warehouse space, maybe that's not in the cards for the next 2, 3, 4 years. Maybe hiring those 300 employees, maybe they'll walk in and say, "Hey, look, we can make do with 100 employees at this time and we'll see where things shake out." But for credits and incentives purposes, the incentives package was previously awarded based on the original estimates, so the states don't want to pay for credits and incentives with regard to activities of a business that will not be going forward or not planned to be happening in the next couple years.

One thing that states are going to be doing is looking to say, "Hey, look, if you're currently in an application process for credits and incentives and the facts have changed," they're going to revise their package. They may even pull the package entirely. If they previously awarded a credit incentive, they're going to make sure that companies are actually doing what they proposed that they were going to do to attract that credit and incentive. They're going to make sure the businesses are holding up their end of the bargain. They don't want to be spending credits and incentives money on something that they're not going to receive any benefit from. Most states are good folks. They're trying to help business survive, but they're not in the business of giving out free money for no benefit on their end. So, I definitely see that as a next step: states and locals are going to be trying to make sure they're getting a bang for their buck

People working from home: how do you think the increase in remote working, in particular brought about by COVID, will affect credit and incentives programs?

[Skrinak] It's interesting. We've talked about how credits and incentives, the last run with regards to how states are looking at raising revenues or decreasing expenditures. This is also another area that we're looking at remote employees, how's it impacting companies with regard to nexus or filing requirements in the state. This is also going to have a big impact on credits and incentives. The two main players with regard to what could trade and opportunity for a business for credits and incentives is capital investment in a state and employment within a state.

I've been working from home for over a year now. I haven't skipped a beat. I think a lot of people out there are seeing the same thing. They're not skipping a beat, their employees may not be in the state in which they would normally be in. It actually opens up the ability to attract employees from other states as well, as they can remote work.

So that cornerstone, the credits and incentives package of increasing employment in this particular state, you're going to see companies not getting as much credits and incentives based upon the employment portion of that formula. They're not going to be hiring a hundred specific jobs, where everyone's going to come every day and report to one specific office in the state. Of those 100 new employees, maybe 60 of them are going to be outside the state, working remotely. That's going to have a direct impact on the credits and incentives. The one area that I thought was interesting was, some states are trying to jump on this and say, "Hey, look, this may be an opportunity for us." One of the states that I thought was really interesting, and my wife had some very, very big interest in looking at this particular program, was Hawaii.

They were offering movers and shakers programs, where it was basically trying to attract temporary residents to move to Hawaii, to work remotely. They were promoting that. They were trying to give personal incentives, whether it be reduced airline travel, reduced hotel stays, to try to get folks to come to Hawaii, so they can work remotely.

That looked pretty attractive in the winter in Pennsylvania.

So looking at that, Hawaii's goal was, "Hey, look, people can work anywhere, why not have them work here?" And when they're not working, they're going to be increasing our economy. They're going to be paying hospitality money. They're going to be going out to dinner. They’re going to be renting surfboards while they're here. It's going to be a boost to our economy, especially at a time when folks weren't traveling. So, they're trying to jump on the bandwagon and say, "Hey, look, you don't have to work from your home, you don't have to work from your company's headquarters, why not come to Hawaii?" Which was a pretty interesting take on Hawaii's part.

What do opponents of credits and incentives point to when they seek to show that credits and incentives aren't as effective as proponents of credits and incentives think?

[Skrinak] Proponents are basically saying, "Hey, look, we're bringing these businesses in specifically for these credits and incentives." They would be going to another state. They would be going to another locality if it wasn't for this package that we're offering. The opponents are saying, "Hey, look guys..." Taking from my perspective, when I speak to my clients or prospective clients, and talking about state and local tax issues, I always preface everything, I say, "Hey, look guys, I'm not trying to have state and local tax run your business. You're going to run your business in a manner that makes the most sense from a business perspective." State and local tax is one point of a concern for running a business. The same thing that the opponents are saying, "Hey, look guys, businesses aren't moving specifically to state A because they're getting a thousand dollars for new job opportunity, they're moving to state A for other factors." They're moving to state A for the business environment. They're moving there for the state infrastructure. They're moving there for skilled workforce. The great colleges and universities out there, they're highlighting those areas.

Technology Row down in North Carolina, it's booming down there. They're pointing to that and saying, "Hey, look, credits and incentives may have a small role in what's attracting a business, but it's not tipping the scales." Now, they're looking to say, "Hey, look, what type of transportation factors? What's the cost of employment?" All those things are much more determining factors in a business moving, expanding or relocating within a state.

They're basically stating, "Hey, look, we're basically throwing good money out there for businesses that potentially could have moved here anyway, based upon what we're offering from an overall business environment." So, that's the opponent side.

What are states doing currently to investigate whether credits and incentives programs they've agreed to, or are looking into, are working as intended?

[Skrinak] Like you said, the one main thing states are doing, and localities are looking at monitoring what credit and incentive agreements are currently out there. What agreements have prospectively been entered into? Like I said before, making sure the business end is holding up their end of the bargain. They want to make sure that their businesses are creating the jobs, investing the capital that they agreed to once the agreement was started. You'll see states like Wisconsin. Wisconsin recently amended an incentive package that they had with a large electronics manufacturer. The manufacturers said, "Hey look, we've come in into your state, we're going to create this huge campus, we're going to create all these employees." And they started reviewing what was actually being spent, what was actually being created from a jobs perspective. It wasn't lining up with what they agreed to.

So, they've recently amended that package with that manufacturer. The package was a 15-year package of various tax cuts and incentives. They scaled it back to six years, and they significantly cut the amounts that were being awarded to that business. You also have Ohio. They recently sought to have clawbacks from an auto manufacturer. The auto manufacturer didn't live up to the agreement. So, fallback is basically where a state is trying to recoup monies that were previously paid to the business. Basically, they gave them $10 million upfront; the clawback, their saying, "Hey, look, you're really only entitled to $4 million. We want to get that other six million back in our pockets." You're going to see some attempts by states for clawbacks or, like I said previously in Wisconsin, amending the agreement. One state, they actually created a task force with New Jersey.

They're looking to ensure the same thing, that the credit and incentive packages are being followed appropriately by the state. They're going as far as looking at the specific applications. The one thing you have to prove is say, "Hey, if it wasn't for these credits and incentives, we would have gone somewhere else." They had to show that the credits and incentives were a large influence on the decision of the business to expand within the state, to get those credits and incentives. While New Jersey is going through these applications and saying, "Hey, look guys, we don't think this kind of matches." There is one facility in New Jersey where folks were saying, "Hey, look, we're going to move to your state, we're going to put our operations in your state." The actual facility was a large office with many little tiny offices, where folks were saying that they were doing business out of. The states found out about this and they're trying to get out of those agreements. Same thing: try to get out of it, change it, or clawback the credits that were previously awarded.

Credits and incentives were discussed in the 2021 PICPA Fiscal Responsibility Task Force report provided to the Pennsylvania House of Representatives. Can you tell us about the process of putting together the report, the task force’s findings in the area, and next steps as far as the report being reviewed?

[Skrinak] The Fiscal Responsibility Task Force is a group of us that kind of meet every couple years, usually when there's a new administration coming into Pennsylvania, or some very hot topics are pressing. We want to basically tell the legislators in Pennsylvania, we want to give them a low-down of concerns that we have as practitioners, residents in Pennsylvania, businesses within Pennsylvania. We want them to know, "Hey, look guys, here's where our concerns lie. We want to make sure you understand the issues that we're seeing." This current Fiscal Responsibility Task Force covers three main areas: taxation – included under taxation was credits and incentives – medical marijuana and possible recreational marijuana, legalization of that. We looked at human services, looked at public education. We try to be very well-rounded in what we're presenting and helping the legislators understand the broad spectrum of issues that we as Pennsylvanians are dealing with.

My initial thought was, I'm going to jump into this. I'm going to compare Pennsylvania to the other states’ credits and incentives packages. Do a compare and contrast. So, I started jumping into that and it's rather difficult to compare Pennsylvania to other states with regards to just taxation, let alone going into the granular and saying, "How does our credits and incentives packages compare to other states?"

That was becoming rather difficult. We kind of pulled back and said, "Hey Jason, why don't you just focus in on Pennsylvania specifically?" So, that's what I did. I went in and said, "Okay, look, here's the Pennsylvania credits that are out there." A lot of the report from my perspective focused on a task given to Pennsylvania's Independent Fiscal Office. They were tasked with it over a five-year period. "Hey guys, take a look at our credits and incentives packages, let us know what you think. Let us know what you think is working, what's not working, what needs tweaks. Let us know some suggestions that you think may be able to make Pennsylvania more competitive with our incentives and credits."

It was pretty interesting going through that. One of the items, one of the specific credits that they reviewed, was a very popular credit. Pennsylvania has had a Jobs Creation Tax Credit program, very popular. I had many clients take advantage of it. Millions of millions of dollars were being awarded for jobs created in Pennsylvania. Well, this IFO report came in and it said, "Hey, look guys, this is not really moving the needle on people creating jobs in Pennsylvania." Similar to what some of the proponents of overall credits and incentives packages were stating. They’re saying, "Hey, look, we need to address this, we don't think you're getting the bang for your buck that you're thinking of."

So based upon the IFO report and internal studies and negotiations, it was decided that effective June 30, 2020, that program is no longer in existence in Pennsylvania. They got rid of it. That was one I was kind of surprised about because, like I said before, that program was wildly popular and just to have them pull it out…it just shows that states are looking at these items. They're making tough decisions to determine, is this in our benefit or not? Should we be going forward with this? The one thing that I would like to kind of keep an eye on after the Fiscal Responsibility Task Force was released, and just keeping a pulse as to what Pennsylvania is doing compared to other states, there are some great comments, recommendations, and questions that the IFO raised. They're looking at, "Hey, should we consider making some of these credits in Pennsylvania refundable?" A lot of credits, basically you can only use that against the tax liability, which makes sense, but making a credit refundable makes it a little more popular in the business world.

How about looking at, can we market and promote underutilized programs? There's a couple programs out there that, I knew they were out there, but I had no idea the fiscal impact. There’s a bone marrow donors program. I think that over a five-year period or so they've provided for a couple thousand dollars’ worth of credits. Well, when you take a look and see it from an administrative perspective –what's the cost of running that program versus what the outlay is for credits going out – it doesn't make sense. They're going to have to start promoting some of these programs to make sure people are aware of them. Going back to making sure that they are following up, engaging with the business community to ensure that the programs that credits and incentives were awarded are being followed. I think that is going to be a key going forward, not just in Pennsylvania, but across the U.S.