Examination of State Tax Credits Begin

The state’s tax credit incentive programs have begun to be scrutinized by the Legislative Tax Expenditure Committee. The Committee was created as a result of legislation passed in 2010 that created a ten-person joint committee of the Senate and the House. Three Democrats and two Republicans from the Senate joined Three Republicans and two Democrats from the House to examine tax credits within the tax code. Specifically, the legislation called for a regular review of all tax credit, withholding credit, and revenue division programs in order to facilitate the reauthorization of successful programs and to do so at a cost that can be accommodated by the state’s annual budget.

For purposes of this article, we will look at the programs that the Economic Development Authority and the Department of Cultural Affairs administer. The Department of Cultural Affairs administers the Historic Preservation Tax Credit, which is capped at $50 million per year. The Economic Development Authority administers eight separate programs that are currently part of code and the Authority has a total cap of $120 million in tax credits that it may allocate throughout its programs with certain restrictions. These programs include: High Quality Job Creation, Enterprise Zone, Film Television and Video Project (currently administered by the Attorney General’s office after having been put on hiatus), Corporate Tax Research, Assistive Device Tax Credit, Community Based Seed Capital, Innovation Fund Investment, and the Brownfield/Grayfield Program. All of these programs exist, but all are not funded in any given fiscal year. The allocations for FY12 are as follows:

  • High Quality Job Creation Program: $90 million
  • Enterprise Zone Program: $15 million
  • Community Based Seed Capital: $2 million
  • Innovation Fund Investment: $8 million
  • Brownfield/Grayfield Program: $5 million
  • Film Television and Video Project: $0
  • Corporate Tax Research: $0
  • Assistive Device Tax Credit: $0

Any program from the list of eight that does not have an amount means it did not receive an allocation of the $120 million in the current fiscal year. Despite being allowed to utilize up to $120 million in credits per year, the Authority has not always actually awarded that amount, nor do all of the credits that are awarded always end up being claimed. For instance, in fiscal year 2011, the Authority was working under its $120 million cap, but only ended up making awards totaling $68.6 million worth of tax credits.

Recent news stories have called into question the effectiveness of such tax credit programs citing the lack of a method to effectively demonstrate a return on investment. That is one of the tasks that the Department of Revenue and the Economic Development Authority was given. So far, only one model has been created. The Economic Development Authority developed a Fiscal Impact Ratio for the High Quality Jobs Program (the only IEDA credit looked at at the review committee). The Authority says that the ratio provides a single, quantifiable measure of the overall value to the State of a proposed project. It is composed by dividing Projected Revenues by Incentive Cost. At the tax expenditure committee meeting, the Authority presented that the program returned two dollars in increased revenue for every state dollar spent and also leveraged $19.26 in capital investment for every state dollar spent.

The Tax Expenditure Committee plans to look at all of the remaining tax credits over the course of the next four years through 2015.