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Do State Tax Incentives Really Work?

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As previously mentioned in this blog, states have become increasingly aggressive in their efforts to generate additional tax revenue in order to help close budget shortfalls. Most states are attacking this problem from two fronts -- enacting new tax laws and enforcing existing ones. "Aggressive" efforts such as these have historically translated into tax increases for most companies. However, recently states have also been "aggressively" offering lucrative tax incentive deals to businesses that commit to creating new jobs in the state. New York and Washington are examples of two states that have recently raised the bar on how far state and local governments are willing to go to attract/retain companies and promote job growth.

START-UP NY

Last month, New York Governor Andrew Cuomo launched a historic new incentives program (START-UP NY) where qualified businesses will not pay any New York State tax (income tax, franchise tax, sales and use tax, property tax, etc.) for 10 years. In addition, qualified employees of the participating companies will not pay New York State income taxes for up to 10 years. You read that right -- NO TAXES for 10 years!

The START-UP NY program designates tax-free zones on qualified New York State or City University campuses, as well as on the campuses of certain qualified community colleges and not-for-profit private colleges and universities throughout New York State. Within each zone, there are specific buildings and, in some cases, raw land (which businesses can develop to meet their specific needs) that afford tax-free status to the tenants.

In order to participate in START-UP NY, a business must create new jobs, must be within an approved industry, and must be either a new start-up company, a company from out-of-state that is relocating to New York, or an expansion of an existing New York company. Finally, the business must obtain approval from both the applicable college/university and the Commissioner of Economic Development.

As Governor Cuomo himself said: "Businesses that are looking to startup or expand, and most importantly create jobs, should look no further. We are leveraging our world-class SUNY system and prestigious private universities to partner with new businesses, providing direct access to advanced research, development resources, experts in high-tech and other industries and all with zero taxes for ten whole years. With an opportunity like that, it's no wonder that companies are lining up for the launch of START-UP NY."

Washington State

Last week, Washington State Governor Jay Inslee signed new legislation that offers tax incentives to all aerospace manufacturers located in the state. The impetus for the legislation, to quote Gov. Inslee, was "to help secure an unprecedented commitment from The Boeing Company to assemble its new 777X jetliner." The new law created the largest state tax incentives package ever offered to any company in any state. Over the life of the package, The Boeing Corporation is expected to receive up to $8.7 billion in incentives. The deal between Washington and Boeing is structured with the goal of keeping the aerospace giant in Washington until at least 2040.

As an aside, the ink was not even dry on the new Washington legislation when it was reported that the union representing Boeing's workers voted to reject their new contract. While Boeing has since said it will continue considering Washington for the 777X assembly, the company has begun looking at alternative lower-cost locations.

This Boeing situation is yet another example of why many people believe that tax incentives are at best, short-sighted and, at worst, having a negative economic affect on a state and local community. Indeed, a 2007 USA Today article chronicled the various problems states have encountered when generous tax incentives were bestowed on companies.

An example of an incentive deal that did not pan out the way the state or company had anticipated would be the incentive package North Carolina put together for Dell Computers. Many North Carolina residents and politicians are still resentful over the $240 million incentive package provided to Dell Computers in 2004. In exchange for the tax incentives, Dell agreed to invest $100 million in a new North Carolina manufacturing facility and to create 1,500 in-state jobs within five years. In 2009, less than five years later, Dell announced that it was closing the facility, and an estimated 900 jobs were lost.

The utilization of state and local tax incentives to attract and retain business continues to be a controversial subject. The not-for-profit organization Tax Foundation annually publishes a report on the business tax climate in all 50 states and creates the State Business Tax Climate Index, which numerically measures each state's tax environment. The report points out that "state lawmakers are always mindful of their states' business tax climates, but they are often tempted to lure business with lucrative tax incentives and subsidies instead of broad-based tax reform." In other words, lawmakers are looking for a quick fix rather than dealing with the underlying issue of long-term tax reform.

David Seiden is a leading authority on state and local tax ("SALT") matters. He is a partner with the accounting and consulting firm Citrin Cooperman, where he leads the firm's SALT Practice. He can be reached at (914) 517-4447 or dseiden@citrincooperman.com.

Citrin Cooperman is a full-service accounting and business consulting firm with offices in New York City; White Plains, NY; Norwalk, CT; Livingston, NJ; and Philadelphia.