iThis post continues a monthly series outlining updates in state tax credits and incentives; included here are legislative, gubernatorial and case law updates. While tax credits and incentives have their fair share of critics, they are a reality in today's competitive business environment in which states compete with each other for jobs and investment. Regardless of the criticisms, state tax credits and incentives benefit many kinds of entities in a number of different ways.
HMB Tip of the Month: When questioning an award of incentives, the question is who has the standing to challenge the award. The most famous case with regard to this topic isDaimlerChrysler Corp. v. Cunoin which the U.S. Supreme Court unanimously ruled that state taxpayers did not have standing to challenge state tax or spending decisions simply by virtue of their status as taxpayers. InCuno, the city of Toledo, Ohio entered into a development agreement with DaimlerChrysler, for it to construct a new Jeep assembly plant near its existing facility in exchange for various tax incentives. DaimlerChrysler was to receive approximately $280,000,000 in tax benefits, in the form of a ten-year exemption from certain property taxes and a credit applied against its state corporate franchise tax for certain investments. Individual taxpayers who challenge this agreement as violating the U.S. Constitution were not found to have standing.
Recently, there have been other cases as who has standing to challenge an incentive award, including the Florida case outlined herein which the plaintiffs lacked standing to challenge a scholarship tax credit program that allowed individuals and companies to receive tax credits for contributions to a fund that paid for religious schools, because they failed to allege a special injury as they suffered no harm distinct from that suffered by the general public. As incentive packages face public scrutiny, the real question is who actually has the standing to challenge such packages.
Recent Announcements of Credit/Incentives Applications and Packages
Indiana- Governor Pence announced that the Indiana Economic Development Corporation has offered GKN Sinter Metals -- a U.K.-based automotive supplier -- $100,000 in conditional tax credits and up to $50,000 in training grants for their plan to invest $6.9 million and create up to 24 new jobs by 2020. Governor Pence announced that the Indiana Economic Development Corporation has offered Polycon Industries -- a plastic container manufacturing company -- $635,000 in conditional tax credits and up to $30,000 in training grants for their plan to invest $15 million and create up to 100 new jobs by the end of 2017
Maryland- Under Armour announced the company's plan to open a 1.3 million-square-foot distribution and warehouse facility at Sparrows Point in Baltimore County as part of the Tradepoint Atlantic redevelopment project. The establishment of the Sparrows Point distribution house, which is expected to open in the summer of 2018, is a collaboration with state and local officials to employ approximately 1,000 employees in the Baltimore area once the facility is operating at its full capacity.
To assist with project costs, the Maryland Department of Commerce has approved a $2 million conditional loan through the Maryland Economic Development Assistance Authority and Fund (MEDAAF), and additionally will fund $2 million in real property and infrastructure improvements through the Maryland Economic Development Corporation (MEDCO). The company is also eligible for various tax credits including Maryland's Job Creation Tax Credit and Enterprise Zones Property Tax Credit, along with the new sales tax exemption on construction materials and equipment at this site, which Governor Hogan signed into law this year. Baltimore County is supporting the project with a $200,000 conditional loan for equipment purchase, contingent on County Council approval.
New Hampshire- New Hampshire Gov. Maggie Hassan (D) and Department of Revenue Administration Commissioner John Beardmore announced that 193 New Hampshire businesses received tax credits in 2016 as part of the state's research and development tax credit program.
Wisconsin- Wisconsin Gov. Scott Walker (R) announced that the Wisconsin Economic Development Corporation has offered Direct Supply Inc. -- a medical supply provider for senior living communities -- up to $22.5 million in conditional tax credits for their plan to expand their global headquarters in Milwaukee and create at least 800 jobs by 2023.
Legislative, Regulative and Gubernatorial Update
California- The California Governor's Office of Business and Economic Development (GO-Biz) has proposed amendments to regulations on the California Competes Tax Credit program to standardize definitions, ensure accuracy in evaluating applicants, and clarify the information that applicants will need to submit as part of the application and evaluation process.
Delaware- L. 2016, S236 (c. 359), effective 08/03/2016, amends the definition of a "brownfield" that is used for purposes of the brownfield facilities credit, to mean real property, the expansion, redevelopment, or reuse of which may be hindered by the reasonably held belief that the real property may be environmentally contaminated. Previously, a "brownfield" was defined as any vacant, abandoned, or underutilized real property the development or redevelopment of which may be hindered by the reasonably held belief that the real property may be environmentally contaminated.
Illinois- SB 321 extends the sunset date of the River Edge Redevelopment Zone program from July 29, 2017 to August 1, 2020 - signed into law as P.A. 99-733.
SB 2241 amends the Illinois Enterprise Zone Act. The bill provides that businesses located in an enterprise zone shall be granted access to build facilities to cross a railroad right-of-way owned by a rail carrier land management company for the purpose of conveyance of grain, aggregate, construction materials, and other commodities over, under, or across that right-of-way, subject to payment of certain fees and costs - signed into law as P.A. 99-525.
Massachuetts- Massachusetts Governor Baker has signed into law a bill (H 4569) that provides up to $1 billion in new investments to create jobs and encourage economic growth in the state, including a college savings tax deduction, an angel investor tax credit, and a smart growth housing tax incentive program.
Missouri- Missouri SB 861, as signed into law, provides tax incentives for companies that create transportation industry jobs and facilities, including creating an income tax deduction equal to 50 percent of the expenses associated with eliminating a business unit located outside Missouri and reestablishing that unit within the state.
Ohio- The Ohio Development Services Agency has amended Ohio Admin. Code § 122:7-1-01 through § 122:7-1-09 regarding the Tax Credit Authority and jobs creation tax credit, effective July 28, 2016. New definitions have been added including for "affiliated entities," "excess income tax revenue," and "income tax revenue." In order to qualify and remain eligible to receive a tax credit certificate, the taxpayer must complete the following by the metric evaluation date and each year of the term thereafter: (1) maintain at least 10 new full-time equivalent employees at the project location; (2) maintain an amount of additional annual payroll equal to or greater than 75% of the federal minimum wage at the time the authority approves the project, multiplied by 52,000; and (3) maintain an average hourly wage of at least 150% of the federal minimum wage at the time the authority approves the project. In the event a taxpayer fails to satisfy these requirements, no tax certificate will be issued for that year and the taxpayer may be subject to remedial action.
Texas- The Texas Historical Commission has adopted amendments to regulations (13 Tex. Admin. Code §§ 13.1, 13.2, 13.6, effective 08/15/2016) concerning the Texas historic preservation tax credit. A long-term lessee of a property may be considered an owner if their current lease term is at minimum 27.5 years for residential rental property, or 39 years for nonresidential real property, as referenced by Code Sec. 47(c)(2). Projects completed on or after January 1, 2015, but before January 1, 2016, are exempt from submitting Part A of the Texas Historic Preservation Tax Credit Certification Application prior to the building being placed in service, only if their costs and expenses were incurred by certain nonprofit corporations within a 60-month period prior to the building's placed in service date. Finally, an applicant can elect to apply to receive the credit on portions of a larger project.
Review of Incentive Programs
Oklahoma- A new Oklahoma state panel that's examining $110 million in state tax incentives this year approved on August 3 evaluation criteria for 11 business incentives scheduled for review. The Oklahoma Incentive Evaluation Commission has been tasked with evaluating the state's tax incentives as the state continues its downward economic spiral.
The costliest tax preference scheduled for review is an ad valorem tax exemption of up to five years for manufacturing facilities, including those engaged in research and development. The incentive costs the state nearly $68 million a year. The commission also approved criteria for evaluating less costly credits, including three aerospace credits, a historic rehabilitation credit, and a film industry rebate.
Various- The Urban Institute released an information brief examining state economic development agencies and their functions, which include attracting, expanding, and retaining businesses, and noted that more scrutiny of incentives and deal-closing funds may lead to more effective development tactics like ensuring adequate infrastructure and skilled labor.
Case Law
Florida- The Florida First District Court of Appeal held that the plaintiffs lacked standing to challenge a scholarship tax credit program that allowed individuals and companies to receive tax credits for contributions to a fund that paid for religious schools, saying the taxpayers failed to allege a special injury.
The Florida District Court of Appeal affirmed the trial court's holding that these appellants lacked standing to bring suit, noting that the appellants lacked special injury standing because they failed to allege that they suffered a harm distinct from that suffered by the general public, as no funds under the FTCSP were appropriated from the state treasury or from the budget for Florida's public schools. All funds received by private schools under the FTCSP came from private, voluntary contributions to Scholarship Funding Organizations (SFOs), after a parent enrolled their child in a private school. Further, the tax credits received by taxpayers who had contributed to SFOs were not the equivalent of revenues remitted to the state treasury. Because there was no diversion of any state revenues from public schools to private schools through the operation of the FTCSP, the appellants' theory of harm and argument for special injury was insufficient to support standing. The appellants also claimed that, but for the tax credits offered in exchange for contributions to SFOs, taxpayers would remit their full tax liability to the state, state revenues would increase, and the legislature would appropriate those revenues to fund the public school system, in some manner that would benefit appellants. The court concluded that this argument was founded entirely on supposition and did not create standing. Therefore, a trial court decision to dismiss the case due to lack of standing was affirmed. McCall v. Scott; Case No. 1D15-2752.
Illinois- An Illinois Appellate Court reversed the trial court in holding that taxpayers have standing to seek an injunction from using public funds to prevent administration of a regulation that exceeds an agency's authority. The taxpayers brought an action for declaratory and injunctive relief against the Department of Commerce and Economic Opportunity (DCEO) contending that a regulation issued by the DCEO was providing greater tax credits than statutorily authorized. The DCEO authorized a tax credit under the Economic Development for a Growing Economy Tax Credit Act (EDGE) and the amount of the credit was not to exceed the incremental income tax attributable to the project, with the incremental income tax being the amount withheld during the taxable year from the compensation of new employees. While the act permits a credit based only on incremental income tax withheld from new employees, the DCEO promulgated regulations allowing tax credit based on both new and retained employees.
The court noted that Illinois courts are "more generous" than the Supreme Court for taxpayer standing and that a taxpayer can bring suit to prevent misuse of public funds even if the taxpayer is not subject to the provisions of an illegal legislative act, and they do not bar standing based on uncertainty of future taxation. The court concluded that a regulation must actually be illegal, or in contradiction of statutory or constitutional law, for a taxpayer to have standing for an injunction to prevent use of public funds rather than simply finding a regulation "unwise, inefficient, improvident, or not the best means of accomplishing a statutory objective." Jenner, et al. v. The Illinois Dept. of Commerce and Economic Opportunity, Ill. App. Ct. (4th Dist.), Dkt. No. 4-15-0522, 08/02/2016.
New York- The Tax Appeals Tribunal has affirmed an administrative law judge's finding that the property tax payments made by the taxpayers (lessees of real property) to an escrow account pursuant to a loan agreement did not qualify as "eligible real property taxes" as required by N.Y. Tax Law § 15(e) to claim the qualified empire zone enterprise (QEZE) real property tax credit against their personal income taxes. The Tribunal agreed that because the taxpayers paid the taxes to an escrow account instead of directly to the taxing authority as lessees are specifically required to do by N.Y. Tax Law § 15(e), they were ineligible for the credit. The Tribunal noted that its determination was supported by the omission of the direct payment requirement for QEZE property owners seeking the credit. (In the Matter of the Petition of Balbo, N.Y.S. Tax Appeals Tribunal, Dkt. Nos. 825765; 826269, 08/18/2016.)
New York- A New York court has dismissed a lawsuit challenging a payment in lieu of taxes agreement and other tax benefits awarded to a $440 million casino project by the Seneca County Industrial Development Agency (SCIDA).
In Nearpass v. Seneca Cty. Indus. Dev. Agency, the Seneca County Supreme Court found on August 18 that the casino was a qualifying commercial project under the Industrial Development Agency (IDA) Act because it is a "profit-making business that will create jobs and promote economic prosperity in the area in keeping with the purposes of the IDA Act." The court also found that there was no requirement under the IDA Act that the SCIDA could grant benefits only to projects that wouldn't be built unless incentives were provided
The plaintiffs inNearpassargued that the resolution approving the agreement with the casino exceeded the SCIDA's authority and that it should be rendered void. The plaintiffs also sought an order declaring that the casino's property wasn't tax exempt. In support of their arguments, the plaintiffs noted that casinos were prohibited in New York when the IDA Act was first enacted and that the State Legislature had never added casinos to the list of project types that can qualify for IDA assistance.
Interesting Updates
California- California should do a better job of designing and coordinating its business tax credits to encourage investment and draw in more manufacturing in the state, business advocates said at an August 9 hearing.
At an Assembly Committee on Jobs, Economic Development, and the Economy hearing on the California Competes tax credit and other business tax incentives, advocates praised the tax breaks, which are designed to encourage growth and hiring. (Prior coverage .) But stakeholders said the state should do more outreach and make its incentives more easily accessible to businesses.
Diane Richards, senior program manager for business recruitment for the city of West Sacramento, said business consultants have told her that the California Competes tax credit isn't a draw because its credit award process is unpredictable. The income tax credit, which was designed in part to boost good-paying jobs in poorer areas, is periodically awarded by the Governor's Office of Business and Economic Development
Connecticut- The Connecticut Department of Economic and Community Development has released an analysis of the state's First Five jobs initiative, noting that the 13 participating companies have created almost 3,800 jobs, which could lead to more than $284 million in state income tax revenue, and have invested nearly $1.3 billion within the state.
The First Five program was signed into law in 2011 and supports large-scale economic development projects to encourage job creation, new capital investments, and business expansion or relocation.
Georgia- Georgia Governor Deal announced that the film and television industry spent more than $2 billion in the state in fiscal 2016, generating approximately $7 billion for the state's economy, and credited the film industry's presence in the state to state and university efforts to increase the base of trained film industry workers and studios.
Indiana- Republican presidential candidate Donald Trump is coming under pressure to explain whether his pick for vice president put "America first" when he approved tens of millions of dollars in incentives for companies that subsequently shipped jobs overseas.
The new attention on Indiana Governor Mike Pence comes afterThe Indianapolis Starpublished a story analyzing records from the Indiana Economic Development Corp. (IEDC) showing that under Pence's watch, the state authorized $24 million in tax credits and grants for 10 businesses that moved operations out of the state and into foreign countries.
Although the state reports that portions of those awards have been withheld or clawed back in response to the companies' moves, much of it is unlikely to ever return to Indiana, given the state's loosely written rules for the programs.
New Hampshire- Governor Hassan and Department of Revenue Administration Commissioner John Beardmore announced that 193 New Hampshire businesses received tax credits in 2016 as part of the state's research and development tax credit program.
New York- The New York attorney general announced a settlement agreement with a major New York City real estate developer, who had accepted tax credits for converting commercial property in Lower Manhattan into residential condominiums but failed to complete the developments, whereby the developer is barred from real estate dealings for two years.
Oklahoma- The Oklahoma Tax Commission denied the Credit for Employees in the Aerospace Sector for a nonqualified employee because his hire date was prior to the effective date January 1, 2009, and he was not newly employed in Oklahoma on or after that date; it found also that the credit was not discriminatory. Docket No. P-15-168.
Rhode Island- The Rhode Island Division of Taxation has released its fiscal 2016 tax credit and incentive disclosure report, which summarizes the amount of tax credits and incentives awarded for each project entity during the year; a total of 23 businesses received more than $29.4 million in taxpayer support.
Various States- In the ongoing debate on whether and how much targeted tax incentives from states influence business decisions, a recent report from Ernst & Young (EY) said incentives are a factor businesses consider when making capital investments.
In the "2016 US Investment Monitor," released August 9, EY said U.S. business investments gave rise to $166 billion in capital investment in 2015, creating or retaining 402,000 jobs.
In a statement, Andrew Phillips of EY said tax incentives do matter. "Many factors contribute to a company's decision to invest in a particular location, and awareness of industry trends, workforce development levels, and the availability of state and local tax incentives can help businesses choose where to locate their mobile capital investments," he said.
