Incentives Watch: Doubts, Clawbacks and Constitutional Violations…Oh My!

Tax incentives are a major part of economic development. However, they sometimes cause major controversies in the process. Massachusetts, along with Kentucky and Washington, have all been making news lately because of tax incentives. Each state showcases some of the questions that can arise when utilizing such programs to encourage business. 

The first question states often ask is: are tax incentives worth it? Recently General Electric Co. announced that it is moving to Boston in exchange for a number of state and local tax incentives, as reported by Martha W. Kessler in Bloomberg BNA’s Jan. 14 Daily Tax Report. However, not everyone is convinced that tax incentive deals like the one GE received benefit the state, according to a Jan. 29 Boston Globe article. Even with all of the questions surrounding incentives, the article cites to an estimate claiming that all states combined spend $40 billion on incentives each year.

Clawbacks and recapture provisions, meant to ensure that businesses receiving incentives meet some minimum level of investment or job creation, raise questions surrounding fairness. If a business fails to meet the proper thresholds, the incentives they received may be recaptured by the state, either in whole or in part. Therefore, the state has an interest in making clawback provisions harsh to ensure business comply, while businesses argue that they deserve something for making substantial investments in the state, even if they do fall short of the state’s threshold.  

This struggle is where we find Boeing Co. and Washington. In 2015, legislation was presented in the Washington House of Representative to create a clawback provision attached to Boeing’s $8.7 billion of incentives, as reported by Paul Shuvovsky in a Dec. 3 Daily Tax Report article. Although the bill was not enacted at that time, the clawback issue has been brought back during this year’s legislative session as House Bill 2638, according to a Jan. 19 article in The Everett Daily Herald. This bill will reduce Boeing’s incentives if the company’s employment in the state falls below certain thresholds, the article states.

Lastly, we come to possibly the most fundamental incentive question of all, who should receive them? One such question was answered in Ark Encounter LLC v. Parkinson, as reported by Bebe Raupe in Bloomberg BNA’s Jan. 29 Weekly State Tax Report. Touching on both tax incentives and religion, this case involves a 2014 grant issuing sales tax incentives to a Noah’s Ark themed tourist attraction in Kentucky. When the state learned that only workers maintaining specified religious beliefs would be hired for the project, it withdrew the incentives, the article states. In the end the taxpayer came out on top, as the court ruled that the state erred in its actions. Kentucky will not appeal the decision, according to a Jan. 26 ABC News article.

Even though tax incentives surrounding economic development are common, these instances show that they are anything but simple. As long as tax incentives continue to be utilized by the states, the debates surrounding them will continue to follow.

*Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Should states continue to utilize tax incentives to promote economic development? 

For more information about tax credits, check out Bloomberg BNA’s Credits and Incentives Portfolios by signing up for a free trial of the Bloomberg BNA Premier State Tax Library today.

By:  Jason Plotkin

Follow Jason on Twitter at:  @jplotkinSALT

Follow BBNA on Twitter at: @BBNATax.