Incentives Watch: States Turn to Sunset Dates, Clawback Provisions to Guard Against Abuse, Wasteful Spending

One way states guard against abusive practices with respect to tax credit programs is to impose certain safeguards, such as spending caps or sunset provisions. Recently, Virginia State Senator Chap Peterson proposed to put a five-year “expiration date” on all state tax credits, according to an Augusta Free Pressarticle. This automatic five-year expiration date gives state lawmakers a chance to review the credit to see if it is meeting its intended purpose.

Each year, Virginia spends $12.5 billion on tax credits, which is “roughly double what the Commonwealth spends on direct aid to public education,” according to the article. Since so much money is being spent on tax credits, this proposal is intended to make sure the funds are being used properly.

In addition to putting a time limit on state tax credits, there are other limitations associated with credits to ensure their intended goals are being met. One limitation is recapture provisions and other safeguards designed to limit abuse of the credits and close any loopholes that taxpayers might think of to get around the credit’s intended goal.

In Pennsylvania, the Promoting Employment Across Pennsylvania (PEP) incentive requires the recapture of credits if the company does not meet certain requirements. In addition, if the company relocates within three to five years after the last year the company received PEP incentive benefits, then the incentive is subject to recapture.

One credit program that has drawn fire recently for a lack of spending safeguards is Georgia’s tuition tax credit. Unlike other states that offer similar programs, Georgia is the only state that does not limit the program to apply to low-income students, according to an editorial in The Atlanta Journal-Constitution. “It is against the law for the state to even ask how many of the scholarships are being awarded to lower-income students,” the editorial states.

For more information about the various state credits, check out Bloomberg BNA’s Business Credits and Incentives Portfolio Series.

In other developments . . .

The New Hampshire Department of Revenue Administration adopted regulations explaining the requirements for the new education tax credit against business profits and enterprise taxes, according to a Weekly State Tax Reportarticle written by Bloomberg BNA State Tax Law Editor Rebecca Helmes.

By:  Kathleen Caggiano
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