Government incentives come in various forms. They may include tax credits, abatements and rebates for real estate taxes paid, cash grants for equipment upgrades or improvements made on real property, low or no-interest financing arrangements, infrastructure support assistance or procurement mandates.
Baker Tilly’s incentive specialists help governmental entities invest public resources wisely by presenting clients’ “but for” data in an easily digestible form that makes investment returns from economic impacts possible.
Tax Incentives
State governments, counties and municipalities use tax incentives as an effective tool for economic development. Such tax incentive programs can include income tax offsets, cash grants, property tax abatements, utility cost offsets, fast-track permitting, infrastructure grants training grants or free/discounted land. Their purpose is ultimately to boost local economies and create new jobs; however they may prove controversial due to competing agendas among states/nations when competing for investment/job creation/growth opportunities; regardless of their effectiveness these investments remain key instruments of economic development.
Tax incentives pose a potential threat to state budgets because they can distort how resources are distributed across various goals. State officials must be careful not to overspend on such initiatives and must ensure that their desired goals are actually being accomplished. Studies have demonstrated the costs associated with state tax incentives can be substantial and have serious fiscal repercussions.
One major drawback of incentives is their lack of transparency, making it difficult for taxpayers and public officials to gauge their effectiveness. Although recent requirements to report tax abatements in financial statements should make these incentives more visible, determining their true value remains challenging.
Tax incentives may change how developers and businesses view projects. They could encourage them to undertake ones they might have considered less likely without the incentive, with potentially negative repercussions for the environment, social responsibility or other aspects of community living.
But the question isn’t simply whether a community should use incentives; rather, the real question lies in which incentives and why. Finding an optimal balance between incentives and other means of reaching community goals – like equitable growth that benefits all residents rather than just business investors alone – and tax incentives as powerful tools should be directed toward meeting critical community goals is the goal here.
Grants
Grants are non-repayable funds awarded by state or local agencies, private foundations, corporations or corporations and distributed competitively after an application and evaluation process. Grants can be used for many different purposes including purchasing equipment for organizations or paying for research & development. They can also support training programs, help disadvantaged communities or provide other community benefits.
Grants are an effective way of stimulating economic activity and drawing investment to any community. Their aim is to support community growth while overcoming constraints that would otherwise prevent private development from proceeding economically, such as environmental contamination that requires costly cleanup costs or labor market mismatches that necessitate workforce training programs or restrictive lending standards that make financing unavailable or prohibitively costly.
Government incentives often take the form of grants, including cash, land grants and tax abatements or credits. Grant types vary between states and federal levels. Local governments typically offer programs tied to local property taxes while state and federal programs may focus on specific needs areas or align with national social policy goals.
Each grant program carries with it its own set of regulations and procedures, which can be complex and time-consuming to navigate. Some require reporting (periodic performance reports as well as audits). Furthermore, most grantees must abide by the contract or agreement that created their grant project; any deviations should be reported immediately to the grant program officer responsible.
Before applying for any incentive, it’s essential to fully comprehend its requirements. Leveraging technology to streamline assessment, analysis and application processes can significantly decrease the time required to realize value from their incentive. Deloitte’s proprietary web-based solution myInsights Government Incentives assists organizations in identifying opportunities, preparing applications and managing compliance so as to achieve successful project outcomes.
Tax Credits
Local municipalities that rely heavily on property taxes as their operating budget rely on property tax revenue for operating expenses are dependent on tax revenue from property taxes to cover operating budget needs, so local governments typically offer incentives like tax abatements, rebates and incremental financing to attract private investments for projects with economic impacts such as job creation or retention tax credits to offset state income tax liabilities; federal governments provide specific programs aligned with national social policies like New Markets Tax Credits or Low-Income Housing Tax Credits that also attract private investment.
Tax credits provide individuals with a reduction of their taxable income for a given year by providing dollar-for-dollar relief against their income tax liability. Some tax credits are even refundable, enabling taxpayers to claim additional amounts beyond what was owed on their bill such as Earned Income Tax Credit and Child Care Tax Credit refunds.
Refundable tax credits can significantly lower a taxpayer’s overall income tax burden. For instance, workers paying $100 in taxes could potentially receive $50 back from the government by qualifying for a refundable tax credit from HMRC and fulfilling other requirements. It should be noted that many programs have expiration dates and income thresholds that change each year that can affect eligibility to claim them.
Research indicates that tax incentives are becoming increasingly widespread worldwide, but their effectiveness remains questionable. One factor for this may be due to foreign investors not solely considering tax incentives when choosing their location; they take into account other considerations as well, including political stability, transparent regulatory systems, natural resources and skilled labor force among others when making investment decisions.
Baker Tilly’s tax incentive specialists assist clients in positioning projects for incentives by creating custom economic impact studies to quantify impacts that are relevant to program administrators and taxpayers alike. Through “but for” analyses that highlight project benefits, our team secures meaningful incentives that maximize project value.
Subsidies
Government entities can offer various financial incentives to encourage investment and spur economic development. This may include cash grants, tax abatements and credits, infrastructure assistance programs, no or low interest financing and free land. They can also be used as rewards for companies investing in specific industrial policies like research and development or employment growth.
Subsidies can be powerful tools for encouraging business development; however, they also come with downsides. Subsidies increase overall government revenue and can distort market economics. Governments subsidize numerous industries including agricultural products, oil & energy producers, housing projects, automakers and even certain forms of healthcare (e.g. Medicare). Their primary purpose is helping an industry overcome production costs or market barriers that might exist within it.
To achieve this goal, the government reduces prices of goods and services produced by entities receiving government subsidy. That way, companies selling at discounted prices can sell more products with ease while still making profit – providing benefits both to them as suppliers as well as consumers alike.
However, these types of interventions typically result in deadweight losses for government expenditures. For example, production subsidies cause commodity production to outstrip market forces when priced with subsidies, increasing consumer welfare but only raising government welfare by an amount equal to area B; area C represents lost economic potential due to less elastic demand for products than could have been achieved otherwise.
Subsidizing certain industries can also lead to corruption and rent seeking, often in the form of businesses donating money to politicians in exchange for promises of benefits once they leave office. To counteract this risk, Baker Tilly’s incentive specialists help clients understand these issues as well as present them to government entities in a clear format for consumption – creating “but for” memos, explaining their projects clearly, and crafting business cases which are easily digested.