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Thursday, January 31, 2019

Challenges of using tax incentives

The federal government and probably all states have numerous tax incentives. These are usually credits that reduce the regular tax liability if the taxpayer takes the required action such as creating a certain number of jobs, investing in a designated zone, installing energy efficient property etc.

These incentives reduce tax revenues. They are usually created in the tax system as a simpler way to administer them as opposed to creating a government function to evaluate programs and make payments where warranted.

Common issues with incentives include:
  • Are they rewarding behavior that would have occurred anyway such as because the action helps the business beyond its tax situation.
  • Whether the incentives is property designed to target the desired behavior, or is also incentivizing behavior that is not desired.
  • Often no system is set up to assess whether the desired benefits occur and what the cost/benefit of the program is.
  • Sometimes there are no clawbacks in place to require the taxpayer to repay the tax savings should it turn out that they did not do what was required or they did not do it for the required time period.
The Comptroller in New Jersey recently issued a 70+ report analyzing the effectiveness of five tax incentives: [1/9/19 press release + Exec Summary + report]
  1. Grow New Jersey Assistance Program
  2. Economic Redevelopment and Growth Program
  3. Business Employment Incentive Program
  4. Business Retention and Relocation and Assistance Grant Program
  5. Urban Transit Hub Tax Credit Program
The study found that the incentives were not properly managed and evaluated. The reviewers found that weaknesses in the system “resulted in improperly awarded incentives of 4179 million, overpaid incentives of $6,6 million, and over-certified incentive awards totaling $52 million, that unless corrected will result in overpayments. In addition, 2,993 jobs were not substantiated as having been created or retained.”

So, good that a review occurred. Let's see what the results of the audit are - will changes be made. But in enacting tax incentives, measures should be taken, most notably to determine the incentive is really needed, and if yes, also enact requirements for appropriate data to be collected, analyzed and reported to the lawmakers annually.

What do you think?

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