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February 2016 Tax Credits & Incentives Update

Tip of the Month: As outlined in this month's post, it is not uncommon for legislatures to focus on certain industries or certain types of credits when considering the viable of tax credits. For example, over the last year and especially in the last month several bills have been introduced in multiple states to end, limit, or bring accountability to film incentives. When you represent or are part of an organization in these industries, it is advisable to have an in-house or third party advisor closely monitoring these legislative actions considering the impact that they may have on future projects.

Recent Announcements of Credit/Incentives Applications and Packages

Delaware- DuPont and The Dow Chemical Co. announced February 19 that their new, post-merger agriculture company will be headquartered in Delaware, following an aggressive campaign by the state to keep DuPont from leaving Delaware.

The announcement comes less than a month after Governor Markell signed into law the Delaware Competes Act (HB 235), which reforms the state's business tax code by transitioning from a three-factor apportionment formula to the single-sales-factor method of apportioning corporate income by 2020.

Markell called the announcement a "win for Delaware" in a February 19 news release. As part of the agreement with DuPont and Dow, the governor will also work with the legislature to pass other reforms to Delaware's tax code, the release said. Those reforms include modifying the state's research and development tax credit to lift yearly expenditure caps and make the credit refundable, and introducing a modernized New Economy Jobs Tax Credit to attract corporate headquarters jobs to Delaware.

New Jersey- New Jersey S 2880, signed into law as Chapter 242, provides up to $25 million in tax credits under the economic redevelopment and growth grant program for infrastructure projects at Rutgers University.

Legislative, Regulative and Gubernatorial Update

Alaska- Governor Walker's proposal to save Alaska money by reining in oil industry tax credits is drawing debate from lawmakers, with some warning it could harm one of the state's largest industries.

The case for downsizing Alaska's generous incentives was laid out February 3 at a House Resources Committee hearing when legislators were told that companies claimed over $7.4 billion in tax credits from 2007 through 2015, with nearly $3 billion of that in state repurchases of credits from companies that lacked the tax liability to use them. The incentives were set up in large part to encourage new exploration and development, especially by smaller companies, but the low price of oil means the state is paying out more in credits while seeing reduced overall tax revenues from the oil industry.

However, the administration's proposal drew a critical line of questioning from other legislators who sought to emphasize how much revenue the state gained from oil industry activity during that period, which was approximately $40 billion. These legislators also stated that they were worried that the proposal could undermine Alaska's economy.

General- Researchers at Ball State University's Center for Business and Economic Research have released a policy brief on the economic impacts of tax increment financing, and recommend greater legislative oversight, better criteria for evaluating potential impacts, and limited use in areas without effective fiscal management.

General- According to a February 3 report from the Center on Budget and Policy Priorities,  income tax cuts and tax incentives to lure companies from other states are not the way to produce more jobsand create healthy state economies. The report concluded that states should concentrate on fostering start-up companies and other young, fast-growing "home-grown" firms because they are the job creators.  Moreover, the report said that large tax cuts mean little to these companies.

Other reports, such as the eighth annual "Rich States, Poor States," from the American Legislative Exchange Council, reached different conclusions, particularly on the issue of whether tax cuts foster job and economic growth.  Those reports maintain that lowering taxes is a critical step for growth. 

Georgia- In a February 2016 policy brief, the Fiscal Research Center at Georgia State University describes Georgia's film tax credit, compares the credit's significant features to credits available in other states, and gives an overview of the film industry in Georgia versus the rest of the United States.  The brief reveals that Georgia's film tax credit cost the state about $925 million in credits from 2009 to 2014, and film and television productions shot in Georgia in fiscal 2015 had an overall economic impact of $6 billion to the state.

Georgia- The Georgia Budget and Policy Institute has released an analysis of HB 919, proposed legislation that would provide a $250 million tax credit program for donations to rural hospitals, and argued that rural communities would be better served if lawmakers expanded access to Medicaid or boosted Medicaid payments to doctors and healthcare centers.

Illinois- SB 2786 was introduced which would amend the Use Tax Act, the Service Use Tax, the Service Occupation Tax Act, and the Retailers' Occupation Tax Act providing that, beginning on July 1, 2016, tangible personal property used in the construction or operation of a new or existing data center that has been granted a certificate of exemption by the Department of Commerce and Economic Opportunity is exempt from the taxes imposed under those Acts. In addition, SB 2786 would amend the Electricity Excise Tax Law providing that beginning on July 1, 2016, business enterprises that are certified as qualifying Illinois data centers by the Department of Commerce and Economic Opportunity are exempt from the taxes imposed under the Act. Finally, SB 2786 would amend the Department of Commerce and Economic Opportunity Law of the Civil Administrative Code of Illinois to provide for certification of qualified data centers. 

Illinois- SB3009 would create the Business and Employment Development Tax Credit Act to replace the existing EDGE Credit that is scheduled to sunset at the end of 2016.  The legislation provides that the Department of Commerce and Economic Opportunity may certify a business as eligible for an income tax credit under the Act and may award credits to certified businesses. SB3009 sets forth the amount of the credit, which is calculated as a percentage of the wages paid to new or retained full-time and part-time employees. The legislation provides that the duration of the credit is 5 taxable years, except that the credit may be carried forward for 5 years, but that the credit may be recaptured.  

Louisiana- Louisiana Governor Edwards has released a statement highlighting the measures he would take to fill the state's $940 million budget deficit, which includes cuts to government spending by suspending refundable ad valorem tax credits for business inventory, and reducing several tax credit provisions for other businesses. 

The governor's proposed cuts to this kind of state spending in tax credits, rebates and refunds include the following proposals:

  • Suspending refundable ad valorem tax credits for business inventory, decreases credit next year (HB 47, estimated $45 mil FY16, estimated $101 mil FY17)

  • Reducing investment tax credit for insurance premium tax insurance companies pay (HB 56, $16.6 mil FY17)

  • Removing 2018 sunset provisions to three 2015 Acts passed, so that the state continues reductions to tax credits, refunds and rebates (HB 22, HB 23 and HB 24)

New Jersey- New Jersey S 3232, signed into law as Chapter 194, authorizes businesses that are due to receive a grant under the business employment incentive program to receive a tax credit instead of the grant.

Oklahoma- The Oklahoma Senate Finance Committee on February 2 approved several bills to reduce or eliminate tax credits, one day after Governor Fallin announced her own tax proposals to help close a nearly $1 billion gap in Oklahoma's fiscal 2017 budget.

SB 883 would reduce tax credits for electricity generated by zero-emission facilities. The bill passed the Finance Committee on an 8-3 vote. Another energy-related bill, SB 1064, which would eliminate a tax credit for the construction of energy efficient residential property, was approved 10 to 3.

The Finance Committee also approved, on a 9-2 vote SB 917 that would eliminate the state's earned income tax credit, which is 5 percent of the federal EITC.  SB 917 would end the tax credit in 2018 unless the credit is "reauthorized by the Oklahoma Legislature after evaluation by the Incentive Evaluation Commission."

Five more bills approved by the committee called for the elimination of the following tax credits in tax year 2018 unless they are reauthorized by the Legislature:

  • a sales tax credit for low-income taxpayers (SB 918);

  • an affordable housing tax credit (SB 919);

  • an income tax credit for donations to organizations that provide scholarships (SB 920);

  • a property tax credit (SB 921); and

  • a railroad reconstruction credit (SB 1052).

Not every tax bill fared as well, including one aimed at keeping businesses from using two separate tax incentives at once, which failed to clear the taxwriting committee. SB 1006 would have amended the Oklahoma Quality Jobs Program Act to limit the period during which a business can receive both incentive payments and tax credits.

Rhode Island- In her 2016 budget address, Governor Raimondo proposed expanding the earned income tax credit to help families keep more of what they earn, expanding the state's research and development tax credit to create more jobs and boost economic growth in Rhode Island, and lowering the unemployment insurance taxes that businesses pay.

South Carolina- South Carolina H 3874 as signed into law provides for a 25 percent income tax credit to an individual or business that constructs, purchases, or leases solar energy property, or purchases and installs geothermal machinery and equipment, and places it in service in South Carolina.

Washington- The Washington Department of Revenue has adopted expedited amendments (WAC 458-20-261) to a rule on commute trip reduction incentives to extend the commute trip reduction tax credit until July 1, 2024, and to make changes to the credit program, including lowering the maximum credit a taxpayer can receive per year to $100,000 and requiring electronic applications.

Washington- A union-led effort to tie Washington state aerospace tax incentives to Boeing Co.'s in-state workforce died February 5 when the House Finance Committee voted down the legislation.  The bill, HB 2638, was the second legislative effort by unions to limit Boeing's access to tax breaks for reducing its in-state workforce following an extension from 2024 to 2040 of incentives including a reduced business and occupation (B&O) tax rate and a B&O tax credit -- a combined break worth over $8.7 billion -- approved in the 2013 legislative session. A bill in 2015, HB 2147, failed to pass as well. 

Numerous States- Several other bills to end, limit, or bring accountability to film incentives have been introduced around the country.

In Rhode Island, H 5726 would convert the film tax credit to a rebate and reduce it from 25 percent of qualifying expenses to 22.5 percent. H 7192 would go further, stripping funding from the film program to pay for bridge repairs by reducing the per-project cap from $5 million to $2 million and the annual cap from $15 million to $5 million.

In South Carolina, S 523 would repeal the state's sales tax exemption for supplies, equipment, machinery, and electricity sold for use in film production. It would not affect the state's payroll tax rebates for film production, which are capped at $10 million annually.

Oklahoma SB 1025 would suspend the state's film incentives for two years, barring payments on any claims submitted in fiscal 2017 or fiscal 2018.

Bills in Washington and Illinois would go even further, repealing the film programs in those states altogether.  Washington HB 2150 would repeal the credit for motion picture production as part of a broader streamlining of the business and occupation tax, while Illinois HB 4440 is a simple, two-sentence bill providing that "the Film Production Services Tax Credit Act of 2008 is repealed" and setting an immediate effective date.

The bills have made varying degrees of progress, but none have been approved yet.

Case Law

New Jersey- in North Oraton Urban Renewal LP v. City of East Orange; Docket Nos. C-146-14; C-147-14; C-148-14, The New Jersey Superior Court held that a city owed the statutory rate of interest applicable to delinquent taxes for property taxes paid by the purchaser of an invalid tax sale certificate from the city, and said the timeframe for the refund was the same as a refund for a reduced or vacated assessment.

New Mexico- In No. 16-01; Matter of Evolutionary Pictures LLC, the issue is whether Taxpayer's payment to the super loan-out company EPPSLO are direct production expenditures subject to the general 25% cap or are direct production expenditures for the service of performing artists subject to a more specific five-million dollar cap under the Film Production Tax Credit.  Taxpayer had already exhausted the five-million dollar cap for direct production expenditures for the service of performing artists. The hearing officer denied the Taxpayer's request for credit treatment the payment to the loan-out company as direct production expenditures for the service of performing artists versus general direct production expenditures under the Film Production Tax Credit.

© Horwood Marcus & Berk Chartered 2022. All Rights Reserved.National Law Review, Volume VI, Number 84

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