Just as companies are looking to reduce costs and boost their bottom line, states are also finding ways to increase revenue. Most states collect income and payroll taxes from businesses (a major stream of revenue for them) and to assist them with increasing revenue (i.e. attract more businesses to their states), many states offer various tax credits and incentives to businesses making significant capital investments or creating new jobs within the state. According to an article in the New York Times, state and local governments are spending more than $80 billion on business incentives annually.
A common misconception is that states only offer incentives to businesses opening new locations, but states also use credits and incentives to encourage growth among in-state businesses. To remain competitive with other states, states revise legislation affecting credits and incentives on a pretty regular basis. It’s important to research the programs each state offers since programs have a tendency to expire or run out of funds.
Many states are also moving away from statutory based tax credits and moving towards more discretionary types of incentives. Statutory credits are incentives that are available “as of right,” meaning that if a business meets the definition of a qualified company and is undertaking qualified activities, the benefit is available to them. Discretionary incentives are incentives that are typically bargained for with a unit of government and must be secured prior to undertaking a project. These incentives typically involve a contract or agreement between the business and the unit of government issuing the benefit. North Carolina, Florida, Ohio and Michigan are examples of a few states that have been moving away from statutory credits and have implemented discretionary types of incentives. Many states are also incorporating clawback or recapture provisions into their agreements, which require businesses to pay back any funds they receive if they fail to hold up their end of the deal.
Some states are offering incentives that may be applied to other types of taxes instead of the most common type - income tax. This may include sales and use taxes, property taxes, insurance taxes and payroll withholding taxes. For example, Georgia allows qualified businesses to elect to utilize certain statutory tax credits against payroll withholding tax if they cannot utilize all the credits against their income tax liability.
As states are becoming more business savvy and becoming more creative with the incentives they are offering to attract businesses to their states, it’s also important for businesses to understand how to navigate the programs and how to maximize their incentives packages.
For more information on tax credits and incentives available in your state click below.
