Government incentives take many forms: cash grants for capital equipment, real estate or payroll expenses; cash grants to cover sales/use tax exemptions/refunds/credits/rebate payments for corporate income tax filings/payments/withholding; low-interest financing options or utility discounts. At NSI we map all relevant incentives and produce customized economic impact reports which quantify their return on investment for both taxpayers and governments alike.
Tax Incentives
Governments offer tax incentives in hopes that they will draw in business investment and create jobs. State and local governments spend billions each year on business tax incentives; politicians often view them as valuable tools for economic development despite the high costs. Unfortunately, few states possess an effective monitoring and evaluation methodology for these incentives.
An example of government incentives for renewable energy producers would be tax breaks. Such incentives help promote sustainable energy by encouraging consumers to switch away from traditional electricity sources toward renewable ones, while simultaneously conserving environmental resources and decreasing greenhouse gas emissions.
State governments and local communities are facing stiff competition among themselves to attract business investment and job creation, often using tax incentives to vie with other states and global economies for investments and jobs. Politicians may take pride in boasting about their ability to lure major companies like Foxconn; however, their deals often come at the cost of local economies.
Tax incentives can be measured as the difference between actual costs of the project and expected benefits, and governments can use various techniques such as cash flow analysis, discount rate estimation and hedging to estimate its true cost and return on investment. These approaches allow governments to gain insight into project costs quickly.
Governments use tax incentives to entice businesses, but grants can also play an integral role in economic development. Such grants may prompt individuals to contribute more to retirement accounts or charities or restore historic buildings while simultaneously providing housing assistance for people who would otherwise become homeless.
While government-sponsored grants don’t have quite the same impact as tax incentives, they can still help increase government revenue. They typically follow a formula designed to offset project costs; for instance, housing grants might ensure that each recipient doesn’t exceed their local median income level.
Grants
Many cities, states and regions provide economic incentives in the form of grants, tax credits and refunds to attract businesses to locate within their communities. Such programs can help business owners overcome financing hurdles while increasing returns on investments while stimulating local economies. It is essential that business owners understand which incentives are available and navigate the complicated rules associated with them to be successful in doing business within these programs.
Governments provide various financial assistance packages in addition to tax incentives, including loans or economic support in the form of grants, loan guarantees and tax credits. Grants provide payments or reimbursements from governments for projects while loan guarantees promise that in case of default will assume debt obligations of project companies. Such incentives help promote economic development while encouraging innovation and protecting the environment.
Bartik contends that government incentives that reward companies achieving specific measurable performance goals are among the most effective government subsidies. For instance, manufacturing firms could receive cash grants from municipalities for agreeing to build new plants within their community – such incentives encourage companies to improve operations and meet benchmarks that result in growth and profitability for the business.
Accounting for government grants can be complex. According to US GAAP, reporting entities can only recognize grants when it believes it likely that all conditions attached to them will be fulfilled; such a determination may be based on past experience with the program or evidence such as an external audit or commitment letter from the grant agency.
Capital projects should record grants received as either a reduction in asset costs, or amortize them straight-line over their useful lives, unlike tax incentives which must be recognized in operating expenses rather than depreciation and amortization calculations. To access federal and state government renewable energy incentive programs, visit The Database of State Incentives for Renewables & Efficiency.