State and Local Taxation

1
State and Local Taxation

• Special Tax Incentives
• Chapter 8

2
Capital Budgeting and Location Choice Decisions

• Tax incentives offered by state and local
  authorities
• General tax incentives offered to all companies
• Negotiated tax incentives
• Collateral effects on income tax apportionment
• Non-tax incentives

3
State-wide Tax Incentives

• Most states tax benefits can be categorized into
  general categories
• Area-specific incentives
• Employee-related incentives
• Industry-specific incentives
• Equipment incentives
• Building restoration incentives
• Resource-related incentives

4
Area-specific Incentives

• Encourages economic development in specific parts
  of the state
• Enterprise Zones
• Tax credits and benefits available to companies
• Foreign Free Trade Zones
• Transactions occurring within this zone are
  treated as if they occurred outside U.S. borders,
  and so not subject to tax

5
Employee Related Incentives

• Tax incentives offered for hiring and retaining
  workers
• As as example, Alaska offers tax breaks for
  hiring under its Work Opportunity Tax Credit
  program and its Welfare to Work program

6
Industry-Specific Incentives

• Manufacturers have ripple effect on the economy
• Incentives are equipment related or enterprise
  zone related
• Natural resource related
• Colorado offers incentives for coal mining
• Soft industries
• Tax credits offered for film production, software
  development, and biotechnology

7
Equipment Incentives

• Manufacturing Equipment Purchases
• Sometimes tied to enterprise zones incentives
• Texas offers capital investment credits when
  certain conditions are met
• Researched Development (RD) Investment
• Benefits for both RD equipment and soft costs
• Kansas offers tax credit against income taxes for
  expenditures

8
Building Restoration Incentives

• Tax credits allow for the restoration of old
  structures
• In Maine, tax credit equal to the amount
  available in IRC 47

9
Resource-Related Incentives

• Incentives for improving the environment
• Delaware offers incentives to companies that
  reduce their wastes or are involved in recycling

10
Firm-Specific (Privately Negotiated) Incentives

• Firms can negotiate privately with state and
  local tax authorities
• States will usually negotiate when the investment
  will create jobs or other ripple-through
  benefits to economy
• Department of economic development usually
  negotiates the incentives

11
Collateral Effects on Income Tax Apportionment

• Where the firm is multi-state, apportion more
  income to the state in which the acquisition is
  made
• Overall effect may increase taxes despite
  incentives

12
Non-Tax Incentives

• Some non-tax incentives can exceed tax benefits
• Favorable state financing
• Other (state-wide) benefits such as Favorable
  Labor Laws
• Local (city) incentives such as Local Revolving
  Loan Funds