Don’t Overlook the Value of State Tax Credits and Incentives

State and local governments around the country provide a wide array of incentive programs. In a 2021 article, the Tax Foundation estimated state and local governments use about $95 billion a year in incentives to promote business expansion.¹ These programs generally come in three forms: tax credits (sales, income, property, withholding), financial incentives (grants and loans), and other cost offsets (subsidized land, utility cost reductions, in-kind training). Some incentives are considered “statutory” and are available by undertaking a qualifying activity, while others are negotiated with the impacted level of government. Generally, such programs are overseen by the governors’ offices and managed by the departments of revenue or economic development agencies.

Incentives are a powerful tool to urge companies to invest in a particular state and may result in a win-win for all parties involved: the incentivized company will receive benefits to make a project successful, and the state will generate new tax revenue from the company in the form of corporate net income tax, sales and use taxes, property taxes, payroll taxes, and so on. There are countless examples of incentives significantly affecting business decisions. For example, Tesla received $330 million in property, sales, and business tax abatements from Nevada for a new electric semitruck and battery facility; Boeing received $155 million of real estate and personal property tax breaks by St. Louis County, Mo.; and Micron will receive $6 billion in New York Excelsior jobs tax credits and infrastructure improvements over the next 20 years.² While these are examples of very large incentives, there are also offers for midsize and smaller businesses. For example, in 2023 EMD Electronics Inc. announced that it will invest $300 million in Schuylkill County, Pa., to build a new facility and create 200 new jobs for which it was awarded grants of more than $1 million by the Department of Community and Economic Development (DCED).³

States vary in their approach to incentives: some are more aggressive, while others rely on their general business climate as a business attraction tool. For example, Alabama and Tennessee pride themselves on economic development and aggressively offer programs to attract new business and specific industries, including new technology, aerospace and aviation, automotive manufacturing, and food/agriculture production. Texas also has been successful with its incentives, highlighted by companies such as Charles Schwab, SpaceX, Tesla, and Toyota who have either relocated or expanded operations. Still others, such as South Dakota and Florida, offer few incentive programs. Pennsylvania tends to be somewhere in the middle regarding incentives.

Pennsylvania’s Incentives Landscape

Companies may choose to conduct business in Pennsylvania for various reasons, including its experienced and skilled workforce, institutions of higher education, and prime East Coast location.⁴ Pennsylvania offers tax credits for various industries (research and development, manufacturing, and film production) and activities (contributions to educational facilities and community revitalization). Specifically, Pennsylvania awarded $857 million in tax credits in fiscal year 2022-2023 and is projected to award $1.2 billion in fiscal year 2023-2024.⁵ Additionally, Pennsylvania spent $530 million on grants, loans, and trainings in fiscal year 2022-2023 and budgeted $512 million in fiscal year 2023-2024.⁶ The commonwealth offers limited grants, financing, infrastructure support, and specialized tax zones, and local units of government offer certain tax abatements. Unlike many states, Pennsylvania has 16 income tax credits, such as the R&D credit, that can be transferred, allowing taxpayers who are unable to use their tax credits to monetize the benefits. However, these credits may be restricted in terms of the percentage of tax that can be offset, with an ordering of credit use when there are multiple credits.⁷ Given the assignable and saleable nature of credits in Pennsylvania, taxpayers should apply for eligible credits, regardless of whether they can be directly used by the applicant.

Unlike many states, local units of government in Pennsylvania that levy special taxes also may offer incentives. For example, the City of Philadelphia has a local Job Creation Tax Credit that can be used to reduce the Philadelphia Business Income & Receipts Tax.⁸

While incentives are the most visible component of economic development efforts, it is only one tool states turn to. Pennsylvania is taking steps to evolve its policies and elevate its brand in the business community. Until recently, Pennsylvania had one of the highest corporate net income tax rates in the country (9.99%). Legislation was enacted that reduced the tax to 8.99% in 2023 and instituted a schedule to reduce the tax by a half percent each year until it reaches 4.99% in 2031. Beyond tax reductions, Pennsylvania is exploring strategies that provide a wider variety of incentives to attract more types of companies to Pennsylvania and spark economic development.

On Jan. 24, 2023, Gov. Josh Shapiro signed Executive Order 2023-05 establishing the Pennsylvania Office of Transformation and Opportunity. The purpose of the new office is to be a “one-stop-shop” for businesses looking to grow in Pennsylvania.⁹ Furthermore, on Feb. 1, 2024, the governor and DCED released their economic development strategy for the state. The plan includes five primary objectives: invest in economic growth and prioritize investments that play to Pennsylvania’s strengths, make government work at the speed of business, create more opportunity and increase paths to the workforce for Pennsylvanians, promote innovation, and build vibrant and resilient regions. The plan calls for empowering five key industries: agriculture, energy, life sciences, manufacturing, and robotics and technology.¹⁰

To support the new and expanded strategy, the Shapiro has asked for $600 million in total investment, including $500 million for the Pennsylvania Strategic Investments to Enhance Sites (SITES) program.¹¹

Conclusion

Governments use various policies, tools, and incentives to compete for business investment and jobs. As part of this effort, they offer a wide array of programs. In Pennsylvania, the Shapiro administration is pursuing strategies to further spark economic growth through development initiatives. Pennsylvania should not only look inward, but also look outward through reviews of other states’ policies and programs and discussions with business and industry experts to understand best practices.

CPAs and other business professionals should understand these business growth plans and address credit and incentive opportunities before executing final decisions. This will ensure their organizations and clients are well positioned to identify and secure available incentives. 

¹ Katherine Loughead, “Illuminating the Hidden Costs of State Tax Incentives,” Tax Foundation (July 22, 2021).

² Jason Hidalgo, “Nevada Approves $330 Million in Tax Incentives for Tesla Electric Semi Facility. What We Know,” Reno Gazette Journal (March 2, 2023); Eric Schmid, “St. Louis County Approves $155 Million in Tax Breaks for Boeing Expansion at Lambert, St. Louis Public Radio (Sept. 19, 2023); Mark Weiner, “Micron Picks Syracuse Suburb for Huge Computer Chip Plant that Would Bring Up to 9,000 Jobs,” Syracuse.com (Oct. 7, 2022).

³ Commonwealth of Pennsylvania, “Governor Shapiro, EMD Electronics Announce $300 Million Investment in Semiconductor Industry in Schuylkill County,” (April 12, 2023).

⁴ Pennsylvania Department of Community and Economic Development, “Why PA: Growth through Innovation, Imagination & Legendary Can-Do Spirit.”

⁵ www.ifo.state.pa.us

⁶ Id.

⁷ Pennsylvania Department of Revenue Office of Economic Development, Restricted Tax Credit Bulletin 2021-02, The Application and Sale of Restricted Tax Credits (Sept. 1, 2022).

⁸ The credit amount for jobs created is 2% of annual wages paid for each new job or $5,000 per new job created, whichever is higher, subject to the maximum amount specified in the commitment agreement. City of Philadelphia, Job Creation Tax Credit.

⁹ George Stockburger, “Shapiro Creates New Pennsylvania Economic Development Office,” ABC 27 – WHTM (Jan. 24, 2023).

¹⁰ Commonwealth of Pennsylvania, “A Ten-Year Strategic Plan for Economic Development in Pennsylvania,” (Feb. 1, 2024). 

¹¹ Pennsylvania Department of Community and Economic Development, “Shapiro Administration Highlights Importance of Investing in New Economic Development Strategy During Visit to Endless Energy in Luzerne County,” (Feb. 8, 2024).