Recently, Vox posted an article in which a research firm argued that tax breaks cause more harm than good, especially for small businesses. At Miles Consulting, however, we have a different take on tax credits and incentives.
For years, Miles Consulting has worked with a variety of clients (of varying sizes) to help them take advantage of tax credits and incentives. But before we can really get to the core of the issue here, we need to take a look at these two different types of benefits.
Tax Credits
To quickly summarize, tax credits are generally statutory, which means that a state or federal law, or corresponding regulation, details what type of company qualifies for a tax credit, how it’s calculated and how it can be utilized. Statutory tax credits by their nature tend to be objective. That is, if a company meets the qualifications, they can benefit from the credit. Note that some credits have annual maximums and there can be significant compliance involved in taking advantage of the benefits. The tax credits are generally reported on annual tax returns.
One example of a tax credit is the California Enterprise Zone hiring credit (which has now expired). This statutory credit dictated the company needed to be located in a designated area (enterprise zone), hire qualified employees and prepare the necessary supporting documentation to claim the credit at rates determined within the law. Once all the qualifications were met, any company that met the requirements could claim the credit.
Tax Incentives
Other tax benefits include negotiated incentives, which are much more similar to the benefits described (and discouraged) in the Vox article. Incentives work by states or municipalities setting aside funds and dispersing them to competing companies in a more subjective fashion, often based upon the companies’ promises to bring jobs to the community.
For instance, a large company may approach a few different states and tell them they’d like to build a manufacturing facility or set up a call center, and they shop around for the best deal they can get. States then work with company representatives to negotiate the best long-term deal to move the large enterprise into their community. Those deals might include reduced income taxes, sales taxes or property taxes (or some combination) or infrastructure support.
A recent real-life example is Tesla Motors’ recent jockeying between California, Arizona and Nevada for the site of their new battery plant. Nevada ultimately won by providing the company with millions of dollars of tax breaks (read more about the deal here).
Communities seeking these deals with companies believe that the short term tax revenue loss will benefit the community in the long term through broader economic growth. Note that negotiated tax breaks often come with contractual clawback provisions, which outline that the company must return some (or all) of the incentives if the company does not deliver on its employment (or other) parameters.
Defending Tax Incentives
Many that oppose these types of tax incentives do so because they claim the benefits are not available to small businesses. And that may be true. Smaller companies do not have the attraction value and political clout that a larger companies have. But the large companies tend to generate more new employees in a shorter period of time, which leads to an economic multiplier. For example, because a large company promises to open a new manufacturing facility and thereby establishes 500 new jobs (leading to 500 new employees and their families), it is likely to ultimately lead to increased tax revenue for the entire community through new shopping centers, schools, home sales, and other jobs (including entrepreneurship), etc.
Most of us love small companies and agree that they are the backbone of our economy. But one very large company can do wonders for a small community looking to grow; that is what communities are trying to grapple with by offering tax incentives.
What about the California Competes Tax Credit?
Interestingly, the California Competes Tax Credit that we’ve discussed in previous blog posts is kind of a hybrid between a negotiated incentive and a statutory tax credit. That’s part of the reason we find it so interesting and continue to see how it will affect businesses and their surrounding communities in the future. It also has a component for small businesses, with 25% of the funding set aside for businesses with sales of less than $1 million.
Do you need help taking advantage of tax credits and incentives for your business? Contact us right away! We look forward to assisting your business make the most of the available options.
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects, including the new California Competes Tax Credit. To learn more, contact us today at www.MilesConsultingGroup.com.
