tax credits

The Internal Revenue Service (IRS) has released its final rules, as required by the Inflation Reduction Act, to make many clean energy tax credits transferable (able to be sold to a third party) or available for elective pay (a direct payment to the credit holder). Both rules may help expand investment in clean energy by providing mechanisms that get capital to the project’s developer immediately, even if the developer is a nonprofit or public entity that would never have paid any taxes on the project. Credits covered by the rules include the production tax credit, investment tax credit, advanced manufacturing credit, and the hydrogen production credit. For more information on the energy tax credits renewed or created in the Inflation Reduction Act, visit epa.gov; for the new IRS rules, visit treasury.gov.

Not all publicly traded companies use savings from tax cuts the same way, NBER researchers James Cloyne, Ezgi Kurt, and Paolo Surico report in “Who gains from Corporate Tax Cuts?  While changes in marginal tax rates and investment tax credits (ITC) can have significant effects on the behavior of publicly traded C-corporations, manufacturers and goods producers are much more likely to recirculate the savings into additional capital expenditure and employment than firms in the service sector.  Publicly traded service sector companies typically use the proceeds from a tax cut to increase dividends to current investors in the firms.

The U.S. Treasury Department announced that the government will begin taking applications May 31 for the first $4 billion of the $10 billion Qualifying Advanced Energy Project Credit program and tax break for solar-and-wind projects in low-income communities. This credit is part of the Inflation Reduction Act and will be available for projects including manufacturing fuel-cell components, adding carbon-capture equipment to existing facilities or processing critical minerals. The department announced $1.6 billion of the initial funding round will be reserved for places where coal mines or coal-fired power plants have closed.

President Joe Biden has signed the Inflation Reduction Act, a $740-billion bill that largely focuses on clean energy and climate resiliency, deficit reduction and health care, funded through tax changes. Unlike the initial proposals for a reconciliation spending package, this legislation provides little spending that will directly affect tech-based economic development strategies, although its climate provisions will spur significant growth opportunities for cleantech. There are multiple provisions and opportunities included in the act that are important for regions to understand.

The Community Development Financial Institutions Fund of the U.S. Department of Treasury awarded 100 community development entities (CDEs) $5 billion in New Market Tax Credits (NMTC) earlier this month. The purpose of this tax credit program is to stimulate investment and create jobs in low-income urban and rural communities that would benefit from economic revitalization — especially amid the financial hardships caused by the COVID-19 pandemic.

“The Achilles Heel of Reputable VCs,” a recent paper by Nuri Ersahin et al., finds that the most successful venture capital (VC) funds make fewer and smaller investments in states after investment tax credits go into effect. These VCs also co-invest with fewer firms, are less likely to invest in “serial” entrepreneurs and experience fewer positive exits after the introduction of the tax credit.

Many of the most successful technology, life science and advanced companies in the country received financing in the form of an equity investment during their rapid growth and scaling stages of development.  Whether viewed as valiant, villains or vultures, the presence of individuals and firms willing to provide capital to companies when they have few physical assets or revenues is strongly associated with healthy regional innovation economies. As a result, considerable policy attention has been focused by states on increasing the amount of risk capital flowing to local startups.

In a new working paper, Sabrina T. Howell of New York University and Filippo Mezzanotti of Northwestern University provide a systematic review of state angel tax credits. One of the most notable aspects of their research is a seemingly-comprehensive index of all of the relevant programs authorized by states over the past 30 years. The results indicate that angel tax credits have some impact on investment activity but not on economic outcomes. The authors provide evidence that the reason for this seeming discrepancy could be due to program design allowing existing activity to benefit from the new credits.

A recent paper published by SSRN provides a detailed look at the relationship between financial incentives and state fiscal health. The authors control for many potentially-related factors and still find significant, negative impacts of incentives. While the study helps fuel calls for critical analysis and careful implementation of tax incentives, the results may not be as clear cut as some coverage may suggest.

A recent article from Pew Charitable Trusts shows how routine evaluations can help states make tangible improvements to their tax incentives. According to Pew, 30 states now have laws requiring evaluation of the incentives, and recent examinations in several states included key components that helped to inform the results. When analyses started with an effort to determine the specific goals of each incentive, their effectiveness was more easily determined. High-quality evaluations also measured economic impact. For instance, Rhode Island’s evaluation of the Motion Picture Production Tax Credit showed that revenue gained would never match the cost of the program.