CDFA Spotlight: State Tax Credit Program Diversity

State agencies take varying approaches to the use of tax credits for economic development. Some, such as Arizona and Maryland provide fewer but more targeted programs while many (Missouri for example) offer a wider variety addressing many industry and investment sectors. The use of tax credits by states is common practice. Both large and small states closely tie their programs to business investment and job creation. This fact sheet highlights some of the unique programs and approaches used by states to encourage tax credit finance including program descriptions and links to over 25 different programs throughout the country.

State tax credit programs differ significantly from the economic development tax credits available from the federal government. Federal programs (historic rehab, brownfield, low-income housing, new markets, etc.) are broad-based, providing flexible financing assistance applicable to nearly every community’s needs. Federal programs remain flexible to allow states to build complimentary programs targeting individual financing needs. Many times the federal programs are used as a source of gap financing to secure projects. In addition, federal programs are often marketed and utilized directly by local economic developers and businesses.

At the state level, tax credit programs are almost entirely controlled by the state agencies authorized to administer the program. While state officials work diligently with local economic developers to increase the awareness of such programs, they are most often used as an attraction, retention or expansion tool by state leaders looking to secure a project. These efforts are often separate from local efforts.

The emergence of tax credits on a state level has developed slowly. State legislators are largely reactionary in the creation of tax credit programs. And, while a host of innovative programs exist, it has been economic trends and individual leaders – not state legislatures – who have been proactive in creating these credits.

The value of tax credit programs is their diversity. They can be tailored to special industry needs, targeted populations and geographic areas, and tied to a state’s economic development strategy. They can also be designed with a direct end user in mind as in the case of large industry or service providers in states with a competitive advantage in a particular industry niche such as forestry, software or biotechnology.

The following is a rundown of some the more unique tax credit programs in select states. This list is by no means exhaustive and simply demonstrates the diverse, innovative and creative ways that tax credit programs can be established. The information provided has been assembled from the various states websites and marketing materials for these programs.

Arizona

Arizona is a moderately active tax credit state with specific programs targeted at core industry niches. The state legislature has worked to develop programs rewarding investment and encourage new job growth and have backed up these programs with adequate funding. Arizona’s programs include:

The Healthy Forest Enterprise Incentives Program provides incentives for certified businesses that are primarily engaged in harvesting, initial processing or transporting of qualifying forest products. The program offers incentives for use fuel reduction, use tax exemptions, new job income tax credits and other benefits.

Motion Picture Production Tax Incentives provide an Arizona transferable income tax credit equal to 10%, 15% or 20% of the company’s investment in eligible Arizona production costs.

The Research & Development Income Tax Credit is a state income tax credit for qualified research and development done in Arizona. This includes research conducted at a state university and funded by the company. The amount of the credit is based on the federal regular credit computation method for Arizona qualified research expenses and Arizona basic research payments. If the allowable expenses do not exceed $2,500,000 the allowable credit is 20 percent of this amount. If the allowable expenses exceed $2,500,000, the allowable credit amount is $500,000 plus 11 percent of the amount of expenses over $2,500,000, subject to certain limitations. The amount of credit carryover that may be used in any taxable year is limited to the amount by which the tax liability exceeds the current year credit for increased research activities.

The Small Business Capital Investment Tax Incentive Program helps expand early stage investments in targeted Arizona small businesses. The program provides tax credits to investors who make capital investment in small businesses certified by the Arizona Department of Commerce. An investor seeking an income tax credit must document to Commerce the investment was made in either a qualified rural or bioscience company or any other qualified small business. For a qualified bioscience or rural company, the tax credit may total up to 35% of the investment amount over three years; for any other qualified business, the tax credit may total up to 30% over three years. If the tax credits exceed the investor’s income tax liability, any unused tax credit amount may be carried forward for up to three taxable years as long as the investor timely claims the credits with Revenue.

Ohio

Ohio has a wide variety of tax credit programs addressing numerous business investment opportunities. Ohio does an excellent job of marketing these credits online with succinct, easy to ready explanations for each available credit.

Ohio also has one of the more unique state technology tax credit programs. The Technology Investment Tax Credit Program provides a tax credit for Ohio taxpayers that invest in small, Ohio-based technology companies. The amount of the tax credit is 25% (or 30% in some limited cases) of the amount invested by the taxpayer. The maximum investment to which this credit may be applied is $250,000 (or $300,000). The credit may be claimed against personal income tax, corporate franchise tax, public utility excise tax or the dealers in intangibles tax. If an investor is investing in an Encouraging Diversity Growth and Equity (EDGE)-qualified entity, or an entity in a “distressed county,” the amount of tax credit is 30% and the maximum investment to which the credit can be applied is $300,000.

Maine

Maine uses tax credits on a relatively limited basis and specifically targets desired investment opportunities when employing credits. The states most significant credit program is the Maine Seed Capital Tax Credit Program. The program is designed to encourage equity and near equity investments in young business ventures, directly and through private venture capital funds. The tax credits can be equal to 40% of the investment or 60% for investments made in businesses located in high unemployment areas.

Connecticut

Connecticut markets two unique tax credit programs targeting urban development and direct business investment. The state has responded to different sectors’ unique needs and designed programs to compliment them.

The Urban and Industrial Site Tax Credit Program is a dollar-for-dollar corporate tax credit of up to 100% of an investment up to a maximum of $100,000,000. This is a significant credit that directly encourages urban and industrial site development and/or investment.

The state’s Corporate Business Tax Credit Program encompasses eleven available credits that provide resources to business who make significant investment in that state. Credits in this program range from tangible personal property investment credits, R&D credits and grant credits.

Missouri

Missouri has a wide variety of tax credits directly focused on assisting businesses. These programs are very unique and provide targeted benefits for financing opportunities.

The Loan Guarantee Fee Tax Credit Program reduces the costs to small businesses in financing projects by providing tax credits for certain federal loan guarantee programs. Specifically, the Department of Economic Development issues state income tax credits to an "eligible small business" for the amount of the guarantee fee paid to the U.S. Small Business Administration (SBA) or the U.S. Department of Agriculture (USDA) for a small business loan.

The Film Production Tax Credit program issues a film production company state income tax credits equaling up to 50% of the company's expenditures in Missouri necessary for the making of a film, not to exceed $1 million in tax credits per project.

The Rebuilding Communities Tax Credit Program helps stimulate eligible business activity in Missouri's "distressed communities" by providing state tax credits to eligible businesses that locate, relocate or expand their business within a distressed community. The tax benefits available include a 40% income tax credit, 40% equipment tax credit, 1.5% employee tax credit and 25% equipment tax credit for varying degrees of investment and job creation.

The state’s Small Business Incubator Tax Credit Program allows for a 50% state tax credit to a taxpayer who makes a contribution to an approved incubator sponsor in Missouri.

Finally, the state provides a program specially designed for vineyards and wine producers purchasing of new equipment and materials by granting a state tax credit for a portion of the purchase price. The Wine and Grape Tax Credit Program issues a state tax credit to an individual, partnership or corporation in an amount equal to 25% of the purchase price of new equipment and materials used directly in the growing of grapes or the production of wine in Missouri.

Maryland

Maryland is an active tax credit state with a variety of programs addressing a wide range of industry needs. The state offers the traditional tax credit programs seen throughout the country such as the Job Creation Tax Credit, Research and Development Tax Credit and variations of the Empowerment Zone Incentives and Enterprise Zone Tax Credits.

In addition, Maryland has three programs for targeted geographical and industry needs. The One Maryland Tax Credit program provides credits for businesses that invest in an economic development project in a “qualified distressed county”. Business may qualify for project tax credits of up to $5 million and start-up tax credits of up to $500,000.

The state’s Biotechnology Investment Tax Credit program provides income tax credits for individuals, corporations and qualified Maryland venture capital firms that invest in qualified Maryland biotechnology companies. The value of the credit is equal to 50% of an eligible investment made in a qualified Maryland biotechnology company during the taxable year. The maximum amount of the credit cannot exceed (1) $50,000 for individual investors; and (2) $250,000 for corporations and qualified Maryland venture capital firms.

Finally, Maryland’s Brownfields Tax Incentive Program provides real property tax credits for revitalization of a brownfield. For five years after cleanup of the site, a site certified by the Department as a "qualified brownfields site" can receive a real property tax credit between 50 and 70 percent of the new increment of taxes on the increased value of the site. In an Enterprise Zone, the tax credit may last for up to 10 years. This credit, combined with other real property tax credits, may not exceed 100 percent of the tax on the increased value of the site.

Florida

Florida provides a number of programs and packages, referred to as both “refunds” and “credits”. This tactic is used in a few states to diversify the common names for these programs and also to target industry sectors important to the state’s economy. Two of the state’s programs are particularly unique.

Florida’s Qualified Defense Contractor Tax Refund (QDC) program provides defense contractors a competitive edge in consolidating defense contracts, acquiring new contracts, or converting to civilian production. The refund may be up to $5,000 per job created or saved in Florida through: the conversion of defense jobs to civilian production, the acquisition of a new defense contract, or the consolidation of a defense contract which results in at least a 25 percent increase in Florida employment or a minimum of 80 jobs. Contracts and subcontracts approved by the United States Department of Homeland Security are also eligible under the program.

The state’s Capital Investment Tax Credit (CITC) program is designed to attract and grow capital-intensive industries in Florida. The program provides an annual credit, provided for up to twenty years, against the corporate income tax. Eligible projects are those in designated high-impact portions of the following sectors: biomedical technology, financial services, information technology, silicon technology, and transportation equipment manufacturing. Projects must also create a minimum of 100 jobs and invest at least $25 million in eligible capital costs. Eligible capital costs include all expenses incurred in the acquisition, construction, installation, and equipping of a project from the beginning of construction to the commencement of operations. The level of investment and the project’s Florida corporate income tax liability for the 20 years following commencement of operations determines the amount of the annual credit.

The state also offers an extensive Enterprise Zone Incentives program that combines resources from both the state and federal government for geographically-targeted investments. Credits and refunds are available for a myriad of investment opportunities.

New Jersey

New Jersey is one of the most active tax credit providers in the country. The state is a model of diverse and innovative programs providing targeted financing resources that blend with traditional financing to achieve desired economic goals. The state offers eleven programs. More importantly, New Jersey is one of the few states that provides carryover and transfer provisions for unused credits. Allowing carryover and transfer of credits provides more flexibility and increases the likelihood that an individual taxpayer will invest in a project. Some of New Jersey’s noteworthy programs include:

The Research and Development Tax Credit may be taken against the corporation business tax liability for those qualifying research activities that are performed in NJ (only). The qualified research activities are limited to scientific experimentation or engineering activities designed to aid in the development of a new or improved product, process, technique, formula, invention, or computer software program held for sale, lease, or license, or used by the taxpayer in a trade or business. For in-house research expenses, this trade or business requirement will be met if the principal purpose for conducting the research is to use the results of the research in the active conduct of a future trade or business. The NJ credit follows the Federal Research and Development Tax Credit code. However, the NJ tax credit covers only the New Jersey research and development activities. Any unused tax credits may be carried forward up to fifteen years.

The Smart Moves for Business Program Tax Credit may by taken against the corporation business tax, partnerships, limited liability companies, those subject to public utility taxes or marine insurance tax liabilities. This tax credit provides New Jersey employers with the tax incentive for participating in the employee commute option programs available in this State. The effect of this initiative is ultimately to reduce traffic congestion and air pollution in NJ and also to enable this state to comply with the mandates of the Federal Clean Air Act and other such programs. The pro rata share of the tax credit may flow through from a corporate partner.

The Redevelopment Authority Project Tax Credit is available to a corporation that is actively conducting a business at a location within a project, as defined by the NJ Urban Development Corporation Act, which project is being financed by, or being carried out under an agreement with the Redevelopment Authority. This credit is a "one time" new employee tax credit that may be taken against the corporation business tax liability. The new employee must meet certain qualifications in order for the corporation to take the tax credit. This tax credit may be passed through to the shareholders of an S-Corporation and the pro rata share of the tax credit may flow through from a corporate partner. Any unused tax credits may be carried forward only one year.

The Neighborhood and Business Child Care Incentive Program Tax Credit is available to taxpayers who are members of a small-to-medium business childcare consortium for the three-year demonstration program. The taxpayer has to have made expenditures during the tax year for a childcare center owned and operated by the consortium or by a contracted sponsoring organization. This tax credit is also available to those taxpayers who made contributions to a sponsor of a neighborhood-based childcare center that was awarded a program grant. For gross income tax purposes, a deduction is allowed to a qualified business in an amount equal to the business's expenditures for childcare physical plant or facilities during the demonstration program. This tax credit is also available as a deduction for an amount equal to the business's contribution, in cash or in kind, to a sponsor of a neighborhood-based child care center. This tax credit may be passed through to the shareholders of an S-Corporation and the pro rata share of the tax credit may flow through from a corporate partner.

This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.