Tax Credits: I haven't posted regularly in years, but I felt compelled

[corktownyuppie]

There's another thread on the board right now regarding Whole Foods. And from time to time people bring up stadium financing. Both of these projects [[and many others, I should add) have been possible because of the use of tax credits.

Now first things first the reason for this post is not about the fairness or unfairness of tax credits. I recognize that many people think that they are fair. I recognize that many people think that they are unfair. I humbly request that the discussion about the justice/injustice of tax credits be pushed to another conversation.

My goal in this post is that people on both sides of the debate [[and myself included) are actually informed about what tax credits are andhow they actually do and do not work.

For example, it's commonly said that __________ project is receiving _________ million dollars in tax credits...and how the _______ million dollars could have been better spent somewhere else. I hear this and I just want to punch my fist through a window.

My understanding of tax credits -- and someone please tell me if I'm wrong -- is that when someone receives a tax credit, they are essentially receive discounts on future taxes that will be owed.

In other words, if you received $100,000 in tax credits, no one hands you a check for $100,000 that you get to spend. It's the equivalent of me agreeing to give you a shoebox full of receipts from CVS every year for 10 years, each with 1000 coupons that say "Save $10 on your next purchase of $50 or more."

Now obviously, my analogy is not 100% airtight. And getting a bunch of IOUs in a briefcase is still better than not getting the briefcase at all. And certainly you can argue that it's unfair that ______________ project is getting the coupons while __________ project is not getting the coupons.

But what is not accurate is to say that that $100,000 in tax credits over the next 20 years is the same as me handing you $100,000 in cash next week.

That said, I would like to hear informed voices explain the mechanics of the tax credits as well as any misunderstandings I may have or any commonly held misconceptions about them.

I'm not trying to defend the use of tax credits. I just want to a make sure that we all actually understand how they work.

[313WX]

You're not wrong.

That said, you're a pretty sharp guy and, if I recall, you're in finance. Thus, I can't help but think there's some hidden agenda or ulterior motive behind this thread.

You say you felt "compelled." What was it that compelled you? Why all of a sudden are you bringing up this random subject out of the blue, and on this forum no less?

[Richard]

You can convert future tax credits into cash,big companies that need them pay a percentage on the dollar.

So if and useing rough math,if you get a million in tax credits and sell them for 800,000 cash you can then use that cash for renovations,or depending on how the property purchase was structured you could even use it in the purchase of the property.

It is really just another tool used in making projects feasible that may not be otherwise.

https://www.mossadams.com/services/a...le-tax-credits

The key in finding out is if they are transferable or not.

The best ones are pollution related ones,or green credits you get the most green for them because somebody always need them more then you.

I see that the debate about the credits and incentives are back on the table at the state level,personally,I think they killed them to stem investment in city of Detroit because they were setting up the bankruptcy at the time and that was their sole objective.

[Don K]

One can argue that these tax concessions come from taxes that wouldn't be paid in the absence of the new development, so it really doesn't cost anything. Having said that, the new development imposes costs of, e.g., police, fire, and EMT, with no revenue to pay for them. It also establishes the principal that, for economic growth to occur, our corporate overlords must not be taxed at all, ever, or else they'll disappear into Galt's Gulch.

As I say, the endgame for Conservatives/Libertarians is that federal income taxes should be $0 for Adjusted Gross Income > $1 million and for all corporations, and these entities should receive complete exemptions from state and local income, property, and other taxes. Also, if you get sick, just die already, and forget about retiring; work until you die at your desk.

[corktownyuppie]

You're not wrong.

That said, you're a pretty sharp guy and, if I recall, you're in finance. Thus, I can't help but think there's some hidden agenda or ulterior motive behind this thread

Ha....I'm flattered that you think I'm sharp and recall my background in finance.

No hidden agendas here. I've just been frustrated at the level of financial illiteracy that pervades public policy debate. It frustrates me when people think [[incorrectly) that a 70% marginal tax bracket means that you're going to pay 70% taxes on your income. Or that Tom Brady is paying 70% taxes on his income.

I don't like the idea of a business getting off of paying taxes for the next 20 years on a building. On the flipside, if it's an empty building that they'll fill with 250 new people that are now paying $1 Million a year in taxes....it's $1 Million more -- EVERY YEAR -- than the city was getting when the building was empty. Not to mention that an empty building brings with it all sorts of negative values by attracting crime and discouraging investment and improvement nearby.

On the flipside, when a powerful business entity leverages its economic power to negotiate discounts in taxation that simply aren't available to the rest of us...there are some serious problems there, too.

It's a complicated debate...complicated enough that I think there are legitimate arguments on both sides and that each situation warrants deliberation and thoughtful consideration. It's totally possible for me to oppose them in one proposal and support them in another.

But it's hard to get to that level of debate when you have a bunch of people saying "It's total BS that ________________ wants ____________ million dollars from ____________."

/rantover

ps I came to this forum because I truly did want to better understands the facets of this issue from a broader base than the echo chamber[[s) in which I spend most of my time.

[Canadian Visitor]

ps I came to this forum because I truly did want to better understands the facets of this issue from a broader base than the echo chamber[[s) in which I spend most of my time.

Leaving 'fairness' out of the equation.......

The details above from yourself and others are accurate.

But one could flesh them out a bit more.

Tax credits come in several forms.

The kind being focused on here, development based credits which offset municipal taxes are essentially a form of reverse tax-increment financing [[TIF).

The municipal government is, in effect handing back a cut of the increase in revenue generated by the development, to the developer.

There are various ways to structure this and I am not an expert on the form or forms this takes in Detroit.

But to illustrate ways this can be done.....

You can have a fixed value credit, let's say $1,000,000, which presumably is based on an estimate of future tax revenues over 'x' years.

That credit can then be applied, in accordance with any agreement in equal installments over a set number of years, or taken at the discretion of the company, varying the amount from one year to the next as achieves the greatest advantage for them.

You can, however, also structure the agreement as with TIF to only cover the difference in assessed taxes [[so that the base amount of property tax that pre-exists development remains payable, and you can only apply credit against the increase).

You can cap single-year deductions [[so some tax is always paid) or the number of years before the deductions expire.

You can also structure the credits as ongoing incentives [[ie. more jobs with a median pay of = greater credit) and/or ensure the City/government participates in any windfall.

***

To afford an example, Google's sister company is negotiating to build a completely new neighbourhood [[800 acres) near downtown Toronto.

To much controversy.....one of the options laid out in their business case for financing this development [[including public infrastructure) was TIF with an alternative proposal of handing over development charge revenue.

The proposal however, also envisions a maximum ROE after which the City and government partners would profit-share with the company [[Sidewalk Labs).

Its a complex dance, including explaining the various models to the public for consideration).

***

I think the challenge, in general, with the use of this model is that its often focused, in the U.S. at least on financing a private interest.

[[the Toronto example is about how to finance the transit/sewers/roads/parks/schools etc)

I think there is a fairness argument to be had as well as a logical one in financing a private interest.

I also think a concern ought to be raised that in so far as expenses rise for government as a result of development, but revenues do not [[at least until said credits expire), that one is left either with poorer services, debt-financed services, and/or higher taxes on everyone else, worsening the conditions for economic development.

Its also an added layer of complexity.

Everyone can't be fully literate on everything, even if most people should be more literate about many things.

How much complexity do we wish to add?

Also how do we 'objectively' pick a winner? If this sort of policy is to be pursed shouldn't there be an openly published criteria for credits available to everyone?

***

Last though is on the income tax example above.

Of course marginal rates and effective rates are confused all the time.

That's before getting into the implications of deductions.

Personally, I favour a deduction-free tax model offset by a high no-tax paying threshold.

Having not done the math, I would arbitrarily say, no income tax on your first $30,000USD in income each year, just to afford an example.

That still leaves people confusing marginal and effective tax rates though, if one retains a progressive structure.

I wonder if we shouldn't just post the tax tables instead of the brackets [[the ones issued to payroll departments so they can execute source deductions properly).

That would allow everyone to see exactly what the effective rate is for any given income level [[subject to no deductions).

[GPCharles]

If you are upset that Company A is negotiating for tax credits, get your state legislature/city council to outlaw tax credits, don't piss and moan at the company for taking advantage what your elected officials have authorized.

This entire tax credit situation sets up state v. state and municipality v. municipality in trying to bring economic development to their state or city. BUT, they can only offer what is authorized by state law or municipal ordinance.

[Wesley Mouch]

When that first tax credit was issued, the success rate was 100%. The project happened. Mississippi [[I think it was) got a factory. 100% success

Works fine at first.

Now, 2,453,467 tax credit agreements later...

Company want to build a plant [[or arena or whatever). Develops budget. Puts in the tax credits it KNOWS ALREADY can be granted. Pitches contract. Says it only makes sense with credits.

Success rate? Approaches 0%.

Every project 'requires' tax credits because they are available. They are of near zero value today.'

I am guessing that your question might be driven by AOC vs. Amazon. Amazon just walked from $3 BILLION in incentives. Why? Because the political environment was toxic. It was clear to Amazon that the City had no commitment to their plan -- but a lot of commitment to the entrenched interests.

$3 BILLION worth less than a good environment to do business. Detroit needs to really understand this. Fix City Hall. Get entrenched interests who are feeding off the corpse out.

The NYTimes article on this had an interesting mention of Detroit:

Instead, Amazon will grow across its tech hubs, which include large outposts in cities like Boston, Austin, Tex., and Vancouver, British Columbia, as well as smaller ones in Pittsburgh and Detroit. It will lose the value it has said it finds in having employees in a centralized corporate campus, but will maintain flexibility to grow where and when it wants.

[13606Cedargrove]

If a project does not pencil out without tax breaks, incentives, subsidies, or whatever else gets layered in, it will probably fail. You cannot overcome fundamental laws of business and economics.

[Atticus]

The other aspect to consider is what action, if any, the government will take against you if you fail to meet the provisions of the tax credit.

For example, if the Illitch organization gets tax credits for an arena project that required building other developments around its arena, or credits for agreeing to renovate a historic property like the Hotel Eddystone... and they know the state/city will never penalize them if they don’t follow through.., then a business can apply for the credit, collect the revenue, and never have to spend money on what was promised. Another good way to make dough.

[corktownyuppie]

If you are upset that Company A is negotiating for tax credits, get your state legislature/city council to outlaw tax credits, don't piss and moan at the company for taking advantage what your elected officials have authorized.

For what it's worth, I'm not upset that tax credits exist. I'm upset that the number of people with strong opinions about the tax credits seems to be much higher than the number of people who actually understand how they work.

[corktownyuppie]

The other aspect to consider is what action, if any, the government will take against you if you fail to meet the provisions of the tax credit.

For example, if the Illitch organization gets tax credits for an arena project that required building other developments around its arena, or credits for agreeing to renovate a historic property like the Hotel Eddystone... and they know the state/city will never penalize them if they don’t follow through.., then a business can apply for the credit, collect the revenue, and never have to spend money on what was promised. Another good way to make dough.

I agree with your sentiment and the concept. If an entity is promised $______ in discounts on future tax bills in exchange for completing ________, then they shouldn't get the discounts unless they complete the ________.

Your comment about Illitch is not the way I understood the agreement. According to my understanding and research, the portion of the incentives attributable to building the other developments around the arena comes to $74MM and is only payable if Olympia follows through on $200MM of additional development around the arena within five years.

I admit that my understanding of this project is relatively surface level, and there lots and lots of layers. If I'm missing something on this, I'm open to hearing about it.


But yes, in essence, I agree with you. These agreements are two-sided, and if one party fails to meet their commitment, the consequences should be clearly defined and punishments should be exacted.

[Wesley Mouch]

For what it's worth, I'm not upset that tax credits exist. I'm upset that the number of people with strong opinions about the tax credits seems to be much higher than the number of people who actually understand how they work.

Understood.

But I am upset about their existence. They are by nature arbitrary. They are given to large companies [[largely). It would be a far better world where governments were encouraged to reduce their tax burden for all, rather than exempt their friends of taxes.

Worst of all, they are unnecessary. When AOC is commissar of the tax office, she will eliminate them. And firms will compete on a level playing field. And cities will tax everyone equally. Hey, maybe AOC isn't so bad after all.

[Lowell]

Good discussion Corktownyuppie and timely with the New York Amazon story peaking.

What doesn't get a lot of notice is the concept of opportunity cost. If a community subsidizes a private business via tax credit or otherwise there is still plenty of costs incurred, as others noted above, to the community's expenses, starting with negotiation costs.

The time, effort and the land permitted for use become time, money and land not available for other ventures--maybe for one that would have happened without grants, meaning a lost opportunity, hence an opportunity cost is incurred.

Should breaks be granted in Downtown / Midtown Detroit which seem to have achieved developmental critical mass? Are the opportunities in Island City so lean that they desperately need to pay an Amazon? I don't think so.

If it's for, say, a new solar farm using an abandoned coal strip mine in West Virginia I get it. If it is a monopoly sports team in a built-up area without even a whiff of business competition, that's another thing. There is merit in some incentives, but it has to be very, very carefully vetted. Otherwise we're walking about with a big "Sucker" sign taped on our back.

[corktownyuppie]

Good discussion Corktownyuppie and timely with the New York Amazon story peaking.

What doesn't get a lot of notice is the concept of opportunity cost. If a community subsidizes a private business via tax credit or otherwise there is still plenty of costs incurred, as others noted above, to the community's expenses, starting with negotiation costs.

Yeah part of the problem here is in the reporting. Any substantive public policy debate should include the pros and the cons of proposal.

Saying that X Company is getting $1 Billion in tax credits doesn't tell us enough by itself. A company getting $1 Billion in tax credits spread over 3 years against $3 Billion in anticipated taxes is getting quite the different deal than getting a $1 Billion tax credit spread over 3 years against $30 Billion in anticipated taxes.

I agree too with the sentiment that it is unfair that large companies get access to these kinds of deals while the rest of us [[myself included) don't have the buying power to give us leverage in negotiation.

On the flipside, if someone wanted to move to Detroit and bring enough employees who'd pay $100MM in taxes every year but asked the city to give them $5MM in discounts every year for 10 years, it would honestly be tough to say no to that.

I don't have all the answers here. Other than that my goal is just a higher level of literacy about the topic.

And it wouldn't be a bad idea for both the cities and the companies negotiating these deals to show citizens what the net difference in new tax revenue is, as well as where it will go.

Everyone talks about how Whole Foods got $4MM in tax credits. We don't hear as often about how much new tax revenue was generated for the city over and above the $4MM. And so the public is left to wonder what we got in exchange for what we gave...which leaves a vacuum that just ends up getting filled with conjecture, speculation, and conspiracy.

[Richard]

Actually Whole Foods got zero credits.

This is an example of what I posted above and how credits are used to structure deals.

The 4.2 million in credits goes to the actual developers,my guess would be as a loan guarantee in order to build the store.

It appears as if the property owner is building the space or build to suit for leaseing to Whole Foods.

So in theory if Whole Foods packs up and leaves the incentives are attached to the actual property and WF leaves with a clean slate.

The mix of incentives from the city,state and federal government is a piece of paper that can be used as leverage to Finiance the construction of the building.

Some of that is outright grants so kinda in a nutshell you are paying the property owner to build the store,good deal for them.

I guess one just needs to ask if it was worth 3 million in order to bring a grocery store in but I think the taxpayers came out okay on that one.

Low risk for Whole Foods,their capital outlay is limited to what it takes to open the door and not build it.