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CPA Now
Feb 26, 2021

Business Tax Credits and Incentives Likely Moving Away from Business as Usual

Jason Skrinak, CPABy Jason C. Skrinak, CPA


COVID-19 placed an enormous strain on all states’ revenues. Many will be looking to increase tax revenues and reduce expenses associated with their operations. One area to expect scrutiny will be state and local tax credits and incentives. States and localities have used credits and incentives to promote business growth and investment within their jurisdictions in direct competition with other jurisdictions.

Proponents of state credits and incentives hold the view that the financial impact is significant, believing that without the credits and incentives the expansions associated with them would not have occurred. Similarly, the use of credits and incentives to attract business expansion or relocation creates more spending within the local economy (additional sales tax) and higher paying jobs (additional personal income tax).

Opponents to the use of credits and incentives say business expansion within a state has little to do with credits and incentives, and instead rely on other factors. Those other factors cited as deciding factors in expansion decisions are transportation, cost of employment, availability of skilled labor force, state infrastructure, and other non-tax-determining factors. One example of other factors having a much larger impact on expansion or relocation decisions can be found by the recent migration of technology companies from California to Texas and Florida. Oracle, for example, moved its headquarters from California to Texas, and Tesla is building a new plant in Texas with the thought of permanently moving out of California. It is widely believed the driving forces behind these recent moves were California’s high housing costs, high California taxes, and the business environment in California.

Pennsylvania capitol building in HarrisburgMoving forward, jurisdictions will be looking at the past, present, and future of credit and incentive programs, and comparing the intended results to what has been or will be achieved.

  • Past – Ensure the commitments associated with previously awarded credits and incentives have been maintained.
  • Present – Review current credits and incentive packages with regards to how they are awarded and determine whether the use of these packages is having the intended results.
  • Future – Jurisdictions will try to align their future and ongoing credit and incentive packages to expectations with regard to how businesses will operate going forward.

The Past

Wisconsin awarded Foxconn, one of the world’s largest electronics manufacturer, a multibillion-dollar greenfield incentive package. In 2017, FoxConn was awarded nearly $4 billion in credits for a $10 billion display screen manufacturing campus, employing close to 13,000 people. Foxconn was to have significant investment in Wisconsin by 2019, with over $3 billion invested, creating over 2,000 jobs. However, by that time, the project only spent $300 million and created over 500 jobs. Wisconsin wants to revisit what the project would ultimately entail with Foxconn, and is seeking to negotiate possible revisions to the credits and incentives offered.

Ohio sought a refund of about $28 million in tax incentives used by General Motors due to the closing of an assembly factory that was to operate at least through 2028. Ohio originally granted about $60.3 million of tax credits in 2008 for the creation and operation of the facility with the talent of 3,700 jobs being created by this project.

Due to the economic uncertainty and changes caused by COVID-19, previously agreed to projects between businesses and state authorities will realize significant changes. The changes could result in reduced investment in capital and employees that were originally agreed to, or even the outright ceasing of the projects. The expectation is that state and local authorities will aggressively review prior agreements to ensure the parameters agreed to have been met or are in the process of being met. Should these agreed upon investments not be met, expect to see additional actions by state and local jurisdictions to reduce or eliminate the originally agreed-upon credit and incentive package.

The Present

New Jersey created an advisory body known as the Task Force on the Economic Development Authority’s Tax Incentives. The task force was created to review New Jersey’s “Grow NJ” and Economic Redevelopment and Growth (ERG) tax incentive programs. The findings of the task force were presented in two reports, the first issued June 17, 2019, and the second issued on Jan. 16, 2020. The findings documented concerns regarding the design, implementation, and oversight of the incentive programs reviewed. It was documented that consultants were seeking incentives for their clients for fraudulent representations, such as potential relocation when this relocation was not actually being considered. The findings of the task force resulted in several voluntary terminations of incentives previously awarded and the referral of other awardees to law enforcement agencies.

Pennsylvania reviewed its credits and incentives, and recently ceased the New Jobs Tax Credit (formerly Jobs Creation Tax Credit) program, effective June 30, 2020. The Independent Fiscal Office issued a report on the New Jobs Tax Credit in January 2019, with findings pointing to the amount of credits being offered not incentivizing the goals of job creation. The thought was the jobs created by those awarded the credit would have been created regardless of the availability of the credit.

In addition to ceasing the New Jobs Tax Credit program, Pennsylvania has tasked the Independent Fiscal Office to review other credit programs. Further discussions of the recent findings of the Independent Fiscal Office have been provided in an upcoming segment of the PICPA Fiscal Responsibility Task Force’s report.

The expectation is additional states will begin taking a closer look at their credit and incentive packages to ensure the application and implementation of these programs are being handled properly and that the impact of the programs provide the intended benefits.

The Future

As state’s adjust to their own post-COVID conditions, they will have to evaluate how businesses have adapted to the post-COVID environment. The pandemic has shown that, in many cases, work can be performed for a business in any state through remote channels. This new remote work environment must be evaluated by states with regard to their credit and incentive programs. Businesses planning for a capital infusion in a state based on a credit and incentive package will not always have the increased employment within that particular state, which may have been common historically based on capital expansion.

Hawaii initiated a remote employee incentive called the Movers and Shakers program. The goal is to have people relocate to Hawaii in the short-term to work remotely in exchange for personal incentives such as free flights to Hawaii and other perks.

We can expect states to be more deliberate regarding increased due diligence as to the business plans for expansion or relocation before entering into credit and incentive agreements. States will also be much more selective in providing credits and incentives to ensure the parameters of the agreement are being met.

Conclusion

State’s must take a hard look at current credit and incentive programs offered, or being considered, going forward. In evaluating these programs, states should consistently and timely provide for the following:

  • Evaluation – Evaluation of results for specific credit and incentive programs.
  • Measurement – Measure the impact of the credits and incentive programs compared to desired results the program was intended.
  • Determination – Determination of proceeding with or enacting credit programs based upon the evaluation of the program, and measure the impact of current programs or estimated impact of proposed programs.

Evaluation must look at whether the goals of the credit and incentive program are being met; if the goals are not being met, revisions to the program or ceasing the program in its entirety must be considered. Revisions that should be considered include eligibility requirements, transparency as to the application and awarding process, usage of awarded credits (such as transferability or ability to sell credits and incentives), and eliminating redundant or seldom-used programs.

Measurement of the impact must have specific, identifiable metrics that allow for an ability to determine the effectiveness of a credit. The measurement of a credit and incentive program should provide for calculations that allow for the understanding of the cost/benefit ratio as well for better targeting of key industries that drive economic development.

Once an evaluation and measurement of a current or proposed program has been considered, the state should make its determination as to whether the credit and incentive program is effective and worthwhile for the benefit of the state economy. In addition to considering credit and incentive programs for economic development, states should also consider other factors that could drive economic development, such as those considered for the migration from California by the technology industry – tax rates, infrastructure, and overall business environment.


Credits and incentives are discussed in PICPA’s 2021 Fiscal Responsibility Task Force Report. Be sure to check out the full report when it is released in early March.


Jason C. Skrinak, CPA, is the founder of Pivot Strategic Consulting in Harrisburg, Pa., and is a member of the PICPA Legislation and State Taxation committees as well as the PICPA Conference on PA Taxes Subcommittee. He can be reached at  jason@pivotsalt.com.


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Disclaimer
Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.