How States Can Manage Carryforward Provisions for Economic Development Tax Incentives

Experts from The Pew Charitable Trusts responded to a request for the Alabama Legislative Services Agency with a letter detailing examples of state programs that place time limits on eligible companies to earn and claim tax credits and how states navigate the fiscal uncertainty of carryforward provisions.

From: Khara Boender
To: Kirk Fulford, Deputy Director of the Alabama Legislative Services, Agency Fiscal Division
Cc: Alison Wakefield
Subject: Follow-Up from Roundtable
Date: Wednesday, January 6, 2021 12:58:00 PM

We’re glad you were able to join us again during the 2020 roundtable on evaluating economic development tax incentives. Apologies for the delay in responding to your request for examples of state programs that place time limits on eligible companies to claim incentives. Controlling the timing of how and when incentives are awarded and paid out is one component of incentive design that affects the fiscal risk posed by incentives. For other strategies to mitigate these risks, including program and project caps, budgeting of incentives, and pay-for-performance, see our 2015 publication Reducing Budget Risks.

Below are a few examples of state programs that have specified time limits for businesses to earncredits:

• Kentucky Business Investment (KBI) program: Businesses in enhanced incentive counties can receive tax credits for up to 15 years, while companies in other counties can receive incentives for up to 10 years. However, businesses must ramp up activities quickly after Kentucky Economic Development Finance Authority (KEDFA) approves their application. At most, companies have two years to meet their job creation and investment requirements. KEDFA also negotiates company-specific caps on the incentives offered to each business. The program does not include a programmatic cap, however.
• Missouri Works Program: Like KBI, the Missouri Works Program establishes a two-year deadline for qualified companies to meet minimum thresholds for the creation of the new jobs, investment, etc.
• Minnesota Job Creation Fund: Businesses first request support for their plans from the local city, county, or township. If the locality approves, the application is forwarded to the state’s Department of Employment and Economic Development (DEED). Once DEED approves the application, a business must make “reasonable progress” on the projects in six months, reach capital investment thresholds within a year, and hit their job creation goals within two years. Businesses can earn incentives for up to five years in the Minneapolis-St. Paul metro and up to seven years in Greater Minnesota.

Below are a few examples of state programs that have specified time limits for businesses to claim credits. Carryforward provisions also contribute to fiscal uncertainty – generally, the longer a business can carry forward an incentive, the harder it will be for state officials to predict the timing of the costs to the state. Below are a few examples of how states seek to mitigate this uncertainty:

• Maine credit for rehabilitation of historic properties after 2007: Projects are required to redeem the credits in equal installments over four years. Each project knows that it will be able to redeem the full installment each year because the credits are refundable. If their value exceeds the taxpayer’s liability, the state pays the difference in a refund check. These project- specific limits can help policymakers know how much the program will cost, so long as state officials are tracking how many projects they have approved and when recipients are scheduled to redeem their incentives.
• Connecticut: Businesses may carry forward the Urban and Industrial Site Reinvestment tax credits for five years from the tax year they were earned, or sell them to another business/corporate taxpayer. Buyers pay a reduced rate so they still receive a benefit.
• New York: The Hire a Veteran credit may be carried forward for up to three years.
• Ohio: The state’s historic preservation program allows five-year carryforwards, which is comparable to many other states—though some states allow carryforwards of 10 years or more.
• Washington, D.C.: In 2019 two pieces of legislation related to the city’s budget included modifications to the district’s Qualified High Technology Companies program. These changes were spurred by the findings of a 2018 evaluation of the program published by the district’s Office of the Chief Financial Officer. The report highlights that this is one of D.C.’s largest economic development tax expenditures, costing the city over $45 million in forgone revenue in 2017 alone. Based on OCFO’s findings, the program is not well targeted, has few fiscal protections, and is poorly monitored. The reforms eliminate carryforward provisions for the program’s franchise tax credits and cut total program benefits in half.
• Several states, including Minnesota, Michigan, and North Carolina, have shifted from tax credits to grant programs in recent years because these programs provide more fiscal certainty than tax incentives.

We hope this helps answer your question; please let us know if any additional information would be useful.

Khara

Khara Boender
Senior Associate, Fiscal and Economic Policy, State Fiscal Health
The Pew Charitable Trusts
901 E Street, NW, Washington, DC 20004