Government incentives are an effective tool to spur economic activity; however, they also come with potential drawbacks. They may increase income inequality by favoring rich individuals or large corporations at the expense of low-income households and may incur costs on lower-income families.
Baker Tilly’s incentive specialists create economic impact reports to demonstrate investment decisions to government bodies. We assist clients in outlining their projects, meeting requirements and quantifying returns on investments for taxpayers.
Tax Subsidies
Tax subsidies are a form of government assistance provided in the form of reduced taxes or rebates that is provided to specific industries or groups of people. They form an integral component of many government programs across all nations worldwide and serve as powerful tools to achieve specific economic goals; however, some risks must also be carefully managed and monitored when using such subsidies.
The government can offer subsidies in four ways: through tax credits; altering statutory tax rates; shifting profits between divisions of vertically integrated corporations and offsetting losses from another company against profits of another; and permitting losses from one company to offset profits of another company. All four methods may alter market prices and lead to distortions. These distortions may create unfair conditions that favor certain groups over others and reduce competition while restricting consumer choices.
One of the largest tax subsidies pertaining to fossil fuels can be found in the US, where these subsidies form part of an overall policy framework intended to spur domestic energy production. With renewables becoming more cost-competitive with fossil fuels, lawmakers and the public alike are scrutinizing these subsidies on account of their suitability, scale, and effectiveness.
Consumer-targeted tax credits such as the Earned Income Tax Credit and Child Tax Credit provide households with lower incomes with an opportunity to reduce federal taxes owed, thus increasing after-tax incomes and alleviating poverty. Such credits serve to decrease income inequality while simultaneously helping address racial and gender inequalities in society.
As much as tax credits are intended to benefit low-income families, they often lead to unintended results that have adverse repercussions for all parties involved – for example increasing consumption of certain goods and services while simultaneously decreasing supply levels of others and changing consumption patterns in the economy. Furthermore, they can alter income distribution in ways that adversely affect both poor and middle class citizens alike.
Tax subsidies have clear, quantifiable consequences that affect both the Treasury and eligible industries alike, with losses directly proportional to their magnitude and degree of targeting. Their effect can also vary greatly depending on size of eligible industry involved and subsidy magnitude and targeting level.
Grants
Grants, unlike loans, do not need to be repaid back and can be provided by government agencies and private organizations for eligible expenses or specific purposes. Although grants can be difficult to secure due to stringent eligibility requirements, applicants need a strong proposal in order to secure funds.
Grants come in all forms and shapes; all designed to help companies meet their goals – be they creating new products, building facilities or expanding operations. Tax breaks, cash grants and free land are usually offered by local governments to entice businesses to locate in an area; incentives account for approximately 12 percent of firm location or expansion decisions.
Grants may be awarded by federal, state, and local governments as well as non-governmental organizations to encourage business investment in certain sectors of their economies. Such incentives could include tax abatements, low-interest financing options, utility discounts and fast track permitting approval processes as well as employee training/recruitment subsidies and capital equipment subsidies; with an estimated value exceeding $50 billion each year.
Grants are awarded from federal, state, or local entities and distributed for specific uses by an entity such as a county, city, town, school district, state agency or institution of higher education. Their amounts can either be competitive or noncompetitive; pass-through funding grants may also be given out from a state agency to other state agencies and units of local government for specific projects or purposes.
Application processes for grants can be long and laborious, and it is crucial that applicants take their time and adhere to instructions precisely. Many grant programs receive more applicants than they can fund; even well-written proposals may fail due to reviewers’ comments; be sure to listen closely as reviewers offer their thoughts before revising your proposal before resubmitting it. Furthermore, grantees are required to provide periodic and final performance reports to their awarding agency which should detail project accomplishments as well as any challenges experienced during its term.
Reimbursements
Government incentives come in the form of grants, cash rebates, tax credits and low-interest loans and are designed to encourage businesses to invest in the local economy, create jobs and generate tax revenue for communities. They may also serve to support environmentally friendly projects by offering grants or cash rebates or even paying for less polluting projects – or cleaning up contaminated sites – as an example; brownfield development after hazardous substance contamination; agricultural grants/loan programs specifically targeting small farmers; low-interest loans for recycled industrial products are some examples of such incentives provided by governments as examples; brownfield development after hazardous substance contamination; agricultural grants/loan programs tailored specifically towards small farmers as well as low interest loans for recycled industrial products from governments are examples;
Incentives have been found to increase employment, capital investments and local incomes. It’s important to keep in mind, however, that not everyone benefits equally from incentive spending; incentives may be paid for through cutting public spending on social programs or by tapping taxpayer revenue which has regressive effects on lower-income households. Baker Tilly’s incentive specialists create a tailored economic impact model which details all specific benefits and costs associated with each incentive type.
The Incentives Reimbursement Expansion Act of 2018 makes possible the Incentives Reimbursement Expansion Act’s ability for state, local, tribal governments as well as non-profit organizations and tax-exempt entities (such as rural electric co-operatives ) to receive certain incentives as payments instead of having to apply separately for them individually – expanding access to investing in clean energy economies while cutting red tape delays.
While reducing administrative costs and streamlining the application process may be desirable, these measures must be carefully considered before implementation. They should only include cost-effective measures that can be accurately measured. Incentives should focus on firms producing tradable goods and services rather than political objectives or geographic boundaries – something particularly essential in economically distressed areas; evidence has revealed this approach results in greater job multiplier than providing incentives directed towards larger, non-economically distressed firms or all firms combined.
Incentive packages should be made available to firms most likely to create many jobs, and should be contingent upon them fulfilling certain conditions such as creating at least some number of new positions within a set period of time and investing capital investments within that time. Such measures aim to foster job creation while making sure public funds are spent wisely.
Requirements
Governments offer various incentives to stimulate business investments and reach social development objectives. Such incentives may take the form of tax abatements, tax revenue sharing, grants, infrastructure assistance assistance or low or no interest financing – each presented as an investment from government entities to be treated accordingly by program administrators and elected officials. For projects seeking meaningful government incentives to be approved successfully, they must demonstrate they wouldn’t have been feasible without public resources being invested – this requirement known as “but for” must be satisfied to secure meaningful incentives from government.
Evaluators need to collect and analyze economic data in order to gauge the effects of incentive programs, so as to estimate their impacts and quantify benefits and costs of projects as well as make recommendations about how best to leverage public funds. Their reports and studies serve to inform policymakers, businesses and investors of public incentives’ effects.
Key challenges lie in allocating an appropriate incentive level. A project may necessitate substantial capital expenses or workforce needs; as a result, its funding requirements will vary based on these variables. When making recommendations regarding allocation levels and costs to state as well as any effect on job creation. The evaluator must take many factors into consideration in their recommendations including their relative cost to state as well as job creation effects.
Once an incentive level has been decided upon, projects can pursue available incentives. This process may involve developing a detailed business case, meeting with relevant governmental representatives and creating application documentation as well as participating in negotiations. Deloitte myInsights Government Incentives helps streamline this process while increasing process efficiency and regulatory compliance.
Recruitment incentives cannot be paid to presidential appointees; non-career appointees in the Senior Executive Service; employees occupying positions that fall outside of competitive service by virtue of being confidential, policy-determining or policy-advocating in nature; agency heads or those expected to become agency heads; SES limited term appointees (whose appointments must first be approved through White House Office of Presidential Personnel); SES limited emergency appointees who require clearance from OPP); agency heads, those expected to become agency heads; or SES limited term/ limited emergency appointees must go through White House Office of Presidential Personnel before starting work; however agencies may pay recruitment incentives to such non-career Presidential appointees who will fill positions that would otherwise be hard for agencies without such incentives – for instance when filling a difficult-to-fill position without such incentives