Incentives Watch: September’s New State Tax Credits

Congressional Oversight

With Wayfair, federal conformity, and legal sports gambling occupying the minds of state legislatures around the country, the 2018 legislative season has proven to be a somewhat quiet year for state tax credits. Aside from big company incentives (e.g., Amazon and Foxconn), state legislatures simply do not have the resources to introduce new tax credit programs. Despite the lull, September did see the enactment of four new tax credits: one each in Maine and Massachusetts, and two in the District of Columbia. The credit policies vary by the unique circumstances facing each state and give insight into the legislatures’ top priorities. 

Massachusetts: Make Me Money, Country Roads

Massachusetts enacted H.B. 4732 on Aug. 10, creating a rural investment fund and corresponding tax credit. Existing rural business or small business investment funds that have received a federal license must apply to become a rural growth fund. Applicants must have at least $100,000,000 invested in non-public companies located in rural areas, and must include estimates of jobs created and tax revenue increase as a result of these investment in their applications. Taxpayers can earn a tax credit for contributions to a rural growth fund once the investment fund receives approval from the Massachusetts Office of Business Development. When the rural growth fund exits the program, certain recapture provisions may limit the amount of capital available to return to investors should the fund create fewer jobs than expected or experience above average internal rate of return. 

The statute reveals three interesting policy insights. First, the legislation is reflective of the growing gap between the success of big cities, such as Boston, and smaller rural towns that struggle with economic recovery and opioid addiction. Second, the limitation on the type of taxpayers that can apply to become a rural growth fund is an attempt to prove that the fund will be professionally managed, attracting more capital and increasing the effectiveness of the credit. Third, recapture provisions ensure that Massachusetts receives a share of the expected growth. If job creation is below expectations or internal return is above certain levels, Massachusetts receives a percentage of the capital returned to investors. The provision may be in response to questions regarding the true benefit of credit and incentive programs and whether they are worth the loss of tax revenue. 

Maine and the District of Columbia: Ascendant Dependents

Two dependent credits were created during the course of September in Maine and in the District of Columbia. Taxpayers in Maine may claim a credit merely for having a dependent, piggybacking on the federal Child Tax Credit under I.R.C. § 24. The credit amount is $300 per dependent for whom a federal child tax credit was claimed, but contains a phase-out provision for those with Maine AGI in excess of $200,000 ($400,000 for joint returns). 

D.C. charted a different course, offering a credit of $1,000 per eligible child for childcare expenses. While appearing more generous, the devil is in the details: eligible children must be under the age of 4, and the credit is only available for the 2018 taxable year. The credit is also subject to income phaseouts, but only for those with D.C. taxable income of more than $750,000 ($375,000 for married filing separately returns). 

Similar credits enacted in different states provide a unique opportunity to compare and contrast different approaches. In high-priced D.C., the affordability of child care services has become a major political issue, and the credit is likely a direct response to those concerns. Also of note is that the credit works in tandem with the expansion of the prekindergarten education government program, reflected in the age limitation, by providing a small overlap with enrollment in prekindergarten. Maine does not have the same affordability issues that D.C. faces, and it opted for a more broad-based credit for most Maine parents. Both credits are capped by income, reflective of the desire to help those that are most in need. 

District of Columbia: Small Businesses Rejoice

The District of Columbia also passed a small business property tax relief credit claimed against individual and corporate income taxes. The credit is available to D.C. retail businesses reporting less than $2.5 million in federal gross receipts and for whom the D.C. retail location is the principal place of the company’s retail business. The credit equals either: 1) the lesser of 10 percent of rent paid during the taxable year and $5,000; or 2) the lesser of the total Class 2 Property taxes paid during the taxable year and $5,000. 

As noted previously, the District of Columbia is an expensive place to live and do business. Limited space suppresses supply, while demand is free to grow unabated. Legislators in D.C. are attempting to respond to this issue facing an exodus of businesses that simply cannot function in such a climate. As with other credits covered in this blog, the benefit is narrowly targeted to small businesses to ensure that multi-national behemoths do not grow their already significant advantage on the taxpayer dime. 

State tax credits can represent a litmus test on the unique issues facing each state legislature. Availability can be broadened to address a widespread issue or narrowed to benefit a struggling slice of the state’s economy or population. The use of tax credits has become a potent tool in the government toolbox, and remaining current on newly minted credits can help individuals and businesses alike across the country. 

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: Are credits an effective tool to address ongoing state issues, and why? 

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