Sweet rewards: state and local incentives arrangements.

• Author: Panasewicz, Marcus

As economists forecast a recession, businesses continue to look for ways to increase their profits and lower their effective tax rates. States are also looking for innovative ways to keep businesses thriving.

Many state governments and local communities help businesses grow and expand by offering various credits or incentives for routine investments, for workforce training, or for more targeted behaviors, such as locating in an enterprise zone. Forty-five states offer tax incentives for job creation and/or industrial investments, and 47 states offer some type of training assistance for employees.

Credits and incentives come in a variety of flavors. Some credits or incentives are "plain vanilla"--they do not require much interaction between the government and the business. Statutory credits are examples of this type. Other credits and incentives require some distinct involvement from business and/or government. Training grants and incentives are good examples of such distinct involvement. Other incentives require more substantive involvement by many parties. Negotiated incentives require significant effort from both government and businesses.

How Good Is "PlainVanilla"?

Often the "plain vanilla" credits or incentives are best because they require only moderate interaction between business and government to claim the credits. For example, the California Enterprise Zone (CAEZ) benefits are among some of the most lucrative statutory benefits in the country and are offered to all businesses operating a wade or business within an enterprise zone. If a business is located in one of the state's 42 enterprise zones, it can receive a tax credit of over $37,400 (over a five-year period, assuming employees work 2,080 hours and make $12 per hour) for each qualified employee it hires, certifies, and retains (Cal. Rev. & Tax. Code [section] 23622.7). Unlike some state credit programs, it is not necessary for the employee to remain employed for the entire five years in order for the company to generate some of the credits. The credit is a function of the number of hours worked and the wage rate paid to the qualified employees for the time they are employed, not exceeding 60 months. In addition, a corporation operating in a CAEZ can generate a tax credit equal to the sales/use tax paid (generally between 7.25% and 8.75%) of the equipment cost to purchase up to $20 million of qualified property. For individuals, estates, trusts, and partnerships, the...