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Raising A (Tif)f About Corporate Incentives Awarded By Local Governments

Posted by Mary Ann Stewart

Recently, the New York Times spent ten months investigating and analyzing tax incentives awarded by hundreds of cities, counties, and states to corporations.  The article questions whether these business incentives really have conferred cognizable benefits to the state and local governments, or whether they have merely caused the governments, and in turn, the taxpayers who are subsidizing the corporations, financial hardship.  Link to New York Times article “As Companies Seek Tax Deals,” NYT.

There is neither a nationwide nor state accounting of the amounts of tax dollars that are either forgiven or refunded back to the corporate developers.   The Times put together a database and discovered that nationally state and local governments give up $80.4 billion dollars per year.   The Times’ database also shows that that in Kentucky, state and local governments spend $1.41 billion dollars per year on incentive programs, with the breakdown being $264 million in personal income tax credits; $108 million in sales tax refunds, exemptions, or other sales tax discounts; and $69.2 million in corporate income tax credits.

Local governments, including fire districts, library boards, school boards, and cities, are faced with escalating operating costs, and shrinking revenues through the devaluation of real estate values, and the public’s growing opposition to any tax increases.   These same governments face severe pressure by corporate developers to forfeit all or a portion of future tax revenues to attract either new corporate development, or to retain existing corporate structures.   Unfortunately, the programs being pitched by the corporations, many of whom are represented by large law firms, are the product of state statutes which are complex, technical, and difficult to understand.  As a result, local government officials often do not anticipate or comprehend the significant tax dollars which they are forfeiting to the corporate developers because of the technical complexity of the incentive programs.  Further, since they are forfeiting future revenues the officials tend to think that they are not giving up real money.

Here in Kentucky, local government officials are regularly bombarded with requests to waive or refund corporate taxes through programs with unassuming acronyms such as IRBs (industrial revenue bonds); TIF (tax incremental financing); and PILOTs (payment in lieu of taxes).  Before jumping into any such arrangement, government officials would be well advised to seek legal advice independent of the corporate developer.  Further, the local government should at the minimum prepare a forecast of what the lost revenue will be; how that will affect the government’s future escalating costs; and how this revenue will be replaced, short of raising taxes upon individual taxpayers. Corporate incentives should spur cognizable business development and increased revenue for the government without becoming corporate welfare subsidized by individual taxpayers.

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