A tax incentive is an aspect of a government's
taxation
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regiona ...
policy designed to
incentivize
In general, incentives are anything that persuade a person to alter their behaviour. It is emphasised that incentives matter by the basic law of economists and the laws of behaviour, which state that higher incentives amount to greater levels of ...
or encourage a particular economic activity by reducing tax payments.
Tax incentives can have both positive and negative impacts on an economy. Among the positive benefits, if implemented and designed properly, tax incentives can attract investment to a country. Other benefits of tax incentives include increased employment, higher number of capital transfers, research and technology development, and also improvement to less developed areas. Though it is difficult to estimate the effects of tax incentives, they can, if done properly, raise the overall economic welfare through increasing economic growth and government tax revenue (after the expiration of the tax holiday/incentive period). However, tax incentive can cause negative effects on a government's financial condition,
among other negative effects, if they are not properly designed and implemented.
There are four typical costs to tax incentives:
* resource allocation costs
* compliance costs
* revenue costs
* corruption costs.
Resource allocation refers to lost government tax revenue resulting from the tax incentive. The second cost refers to the situation when the tax incentives lead to too much investment in a certain area of the economy and too little investment in other areas of the economy. Revenue cost is associated with enforcing the tax incentive and monitoring who is receiving the incentive and ensuring they are properly deserving of the incentive. Therefore, the higher and the more complex the tax incentive, the higher the compliance costs because of the larger number of people and firms attempting to secure the tax incentive. The final cost is similar to the third in that it relates to people abusing the tax incentive. Corruption occurs when there are no clear guidelines or minimal guidelines for qualification.
According to a 2020 study of tax incentives in the United States, "states spent between 5 USD and 216 USD per capita on incentives for firms."
There is some evidence that this leads to direct employment gains but there is not strong evidence that the incentives increase economic growth.
Tax incentives that target individual companies are generally seen as inefficient, economically costly, and distortionary, as well as having regressive economic effects.
Disambiguation
Many "tax incentives" simply remove part of, or all the burden of the tax from whatever market transaction is taking place. That is because almost all taxes impose what economists call an
excess burden or a
deadweight loss
In economics, deadweight loss is the difference in production and consumption of any given product or service including government tax. The presence of deadweight loss is most commonly identified when the quantity produced ''relative'' to the amoun ...
. Deadweight loss is the difference between the amount of economic productivity that would occur without the tax and that which occurs with the tax.
For example, if savings are taxed, people save less than they otherwise would. If non-essential goods are taxed, people buy less. If wages are taxed, people work less. Finally, if activities like entertainment and travel are taxed, consumption is reduced.
Sometimes, the goal is to reduce such market activity, as in the case of taxing cigarettes. However, reducing activity is most often not a goal because greater market activity is considered to be desirable.
When a tax incentive is spoken of, it usually means removing all or some tax and thus reduce its burden.
Pseudo-incentives
Regardless of the fact that an incentive spurs economic activity, many use the term to refer to any relative change in taxation that changes economic behavior. Such pseudo-incentives include
tax holiday
A tax holiday is a temporary reduction or elimination of a tax. It is synonymous with tax abatement, tax subsidy or tax reduction. Governments usually create tax holidays as incentives for business investment. Tax relief can be provided in th ...
s,
tax deduction
Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and tax credits. T ...
s, or tax abatement. Such "tax incentives" are targeted at both individuals and corporations.
Individual incentives
Individual tax incentives are a prominent form of incentive and include deductions, exemptions, and credits. Specific examples include the
mortgage interest deduction,
individual retirement account
An individual retirement account (IRA) in the United States is a form of pension provided by many financial institutions that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayer's ear ...
, and
hybrid tax credit.
Another form of an individual tax incentive is the income tax incentive. Though mostly used in transitioning and developing countries, usually correlating with insufficient domestic capita, the income tax incentive is meant to help the economic welfare of direct investors and corresponds with investing in production activities and finally, many times is meant to attract foreign investors.
These incentives are introduced for various reasons. Firstly, they are seen to counterbalance investment disincentives stemming from the normal tax system. Others use the incentives to equalize disadvantages to investing such as complicated laws and insufficient infrastructure.
Corporate tax incentives
Corporate tax incentives can be raised at federal, state, and local government levels. For example, in the United States, the federal tax code provides a wide range of incentives for corporations, totaling $109 billion in 2011, according to a Tax Foundation Study.
The Tax Foundation categorizes US federal tax incentives into four main categories, listed below:
* Tax exclusions for local bonds valued at $12.4 billion.
* Preferences aimed at advancing social policy, valued at $9 billion.
* Preferences that directly benefit specific industries, valued at $17.4 billion.
* Preferences broadly available to most corporate taxpayers, valued at $68.7 billion.
Corporate tax incentives provided by state and local governments are also included in the US tax code but are very often directed at individual companies involved in a corporate
site selection
The award-winning ''Site Selection'' magazine, published by Conway Data, Inc., is the official publication of thIndustrial Asset Management Council(IAMC). The magazine delivers expansion planning information to over 44,000 readers including corpora ...
project. Site selection consultants negotiate these incentives, which are typically specific to the corporate project the state is recruiting, rather than applicable to a broader industry. Examples include the following:
* Corporate income tax credit
* Property tax abatement
* Sales tax exemption
* Payroll tax refund
In Armenia, corporate income tax incentive is available for Armenian resident entities that meet several criteria under the government’s export promotion-oriented program. Those entities that are part of the government approved program receive reduced corporate income tax rates up to tenfold from the 20% rate.
Taxpayers running their operations in free economics zones (FEZ) are free from corporate income tax in respect of income received from activities implemented in free economic zones in Armenia.
List of largest US tax incentive deals
*Washington:
Boeing
The Boeing Company () is an American multinational corporation that designs, manufactures, and sells airplanes, rotorcraft, rockets, satellites, telecommunications equipment, and missiles worldwide. The company also provides leasing and product ...
, $8.7 billion until 2040, partly for the
777X
The Boeing 777X is the latest series of the long-range, wide-body, twin-engine jetliners in the Boeing 777 family from Boeing Commercial Airplanes. The 777X features new GE9X engines, new composite wings with folding wingtips, greater cabin w ...
*New York:
Alcoa
Alcoa Corporation (an acronym for Aluminum Company of America) is a Pittsburgh-based industrial corporation. It is the world's eighth-largest producer of aluminum. Alcoa conducts operations in 10 countries. Alcoa is a major producer of primary ...
, $5.6 billion
*Washington:
Boeing
The Boeing Company () is an American multinational corporation that designs, manufactures, and sells airplanes, rotorcraft, rockets, satellites, telecommunications equipment, and missiles worldwide. The company also provides leasing and product ...
, $3.2 billion
*Oregon:
Nike
Nike often refers to:
* Nike (mythology), a Greek goddess who personifies victory
* Nike, Inc., a major American producer of athletic shoes, apparel, and sports equipment
Nike may also refer to:
People
* Nike (name), a surname and feminine give ...
, $2 billion
*New Mexico:
Intel
Intel Corporation is an American multinational corporation and technology company headquartered in Santa Clara, California. It is the world's largest semiconductor chip manufacturer by revenue, and is one of the developers of the x86 seri ...
, $2 billion
*Louisiana:
Cheniere Energy
Cheniere Energy, Inc. is a liquefied natural gas (LNG) company headquartered in Houston, Texas. In February 2016 it became the first US company to export liquefied natural gas. As of 2018 it is a Fortune 500 company.
Company history
Initially ...
, $1.7 billion
*Pennsylvania:
Royal Dutch Shell
Shell plc is a British multinational oil and gas company headquartered in London, England. Shell is a public limited company with a primary listing on the London Stock Exchange (LSE) and secondary listings on Euronext Amsterdam and the New Yo ...
, $1.65 billion over 25 years for the
Pennsylvania Shell ethylene cracker plant
*Missouri:
Cerner Corp., $1.64 billion
*Michigan:
Chrysler
Stellantis North America (officially FCA US and formerly Chrysler ()) is one of the " Big Three" automobile manufacturers in the United States, headquartered in Auburn Hills, Michigan. It is the American subsidiary of the multinational automoti ...
, $1.3 billion
*Nevada:
Tesla Gigafactory 1
Gigafactory Nevada (also known as Giga Nevada or Gigafactory 1) is a lithium-ion battery and electric vehicle component factory in Storey County, Nevada, US. The facility, located east of Reno, is owned and operated by Tesla, Inc., and suppl ...
, $1.25 billion over 20 years
*Mississippi:
Nissan
, trade name, trading as Nissan Motor Corporation and often shortened to Nissan, is a Japanese multinational corporation, multinational Automotive industry, automobile manufacturer headquartered in Nishi-ku, Yokohama, Japan. The company sells ...
Canton, $1.25 billion
Historical preservation tax incentive
Not all tax incentives are structured for individuals or corporations, as some tax incentives are meant to help the welfare of the society. For example, the historical preservation tax incentive. The US federal government pushes, in many situations, to preserve historical buildings. One way the government does so is through tax incentives for the rehabilitation of historic buildings. The tax incentives to preserve the historic buildings can generate jobs, increase private investment in the city, create housing for low-income individuals in the historic buildings, and enhance property values. Currently, according to the
Tax Reform Act of 1986
The Tax Reform Act of 1986 (TRA) was passed by the 99th United States Congress and signed into law by President Ronald Reagan on October 22, 1986.
The Tax Reform Act of 1986 was the top domestic priority of President Reagan's second term. The a ...
, there are two major incentives in this category. The first incentive is a tax credit of 20% for rehabilitation of historic structures. A historic structure is defined as a building listed in the
National Register of Historic Places
The National Register of Historic Places (NRHP) is the United States federal government's official list of districts, sites, buildings, structures and objects deemed worthy of preservation for their historical significance or "great artistic v ...
or a building in a registered historic district, acknowledged by the
National Park Service
The National Park Service (NPS) is an agency of the United States federal government within the U.S. Department of the Interior that manages all national parks, most national monuments, and other natural, historical, and recreational propertie ...
. The second incentive is a tax credit of 10% for rehabilitation of structures built before 1936 but are considered non-residential and non-historical.
Impact
According to a 2020 study,
tax competition
Tax competition, a form of regulatory competition, exists when governments use reductions in fiscal burdens to encourage the inflow of productive resources or to discourage the exodus of those resources. Often, this means a governmental strategy ...
"primarily reduces taxes for mobile firms and is unlikely to substantially affect the efficiency of business location." A 2020 NBER paper found some evidence that state and local business tax incentives in the United States led to employment gains but no evidence that the incentives increased broader economic growth at the state and local level.
A 2021 study found that multinational firms boosted wages and employment in localities, but that the surplus that the firms generated tended to go back to them in the form of local subsidies.
See also
*
Taxation in the United States
The United States, United States of America has separate Federal government of the United States, federal, U.S. state, state, and Local government in the United States, local governments with taxes imposed at each of these levels. Taxes are lev ...
*
Tax exemption
Tax exemption is the reduction or removal of a liability to make a compulsory payment that would otherwise be imposed by a ruling power upon persons, property, income, or transactions. Tax-exempt status may provide complete relief from taxes, redu ...
*
Tax competition
Tax competition, a form of regulatory competition, exists when governments use reductions in fiscal burdens to encourage the inflow of productive resources or to discourage the exodus of those resources. Often, this means a governmental strategy ...
*
Texas Tax Code Chapter 313
References
External links
*
{{DEFAULTSORT:Tax Incentive
Tax terms
ru:Налоговые льготы