COVID-19 Puts Business Tax Incentives At Risk

May 15--Tax incentives are increasingly used by cities, and sometimes states, to lure businesses to the area. Most involve some sort of tax break for the incoming business in return for negotiated levels of capital investment, quality jobs or new revenues generated.

These incentives can provide mutually beneficial arrangements for a municipality and the business. Businesses can open new offices or retail locations at a discounted price, and cities can capture long-term economic benefits as well as provide new products, goods and services, and also jobs to the community.

With the breakout of the new coronavirus, companies globally are forced to weather dramatic drops in business and many are forced to lay off employees. These negative outcomes could affect businesses that have received incentives in the past if the terms of their agreements can't be met.

Tony Mastin, a tax attorney with McAfee & Taft and former executive director of the Oklahoma Tax Commission, answered several questions related to the matter:

Because of layoffs and furloughs caused by COVID-19, will businesses face issues maintaining state tax incentives previously awarded them?

Yes, there are several provisions in state law that provide tax deductions, exemptions, credits, payment incentives or other tax preferences to incentivize companies to relocate to the state, increase wages or hire new employees. Some provisions specifically state businesses no longer will qualify if they experience a decrease in payroll or number of employees.

What's one of the more successful incentives at risk?

The Oklahoma Quality Jobs Program is the most popular. About $56 million in incentive payments were paid in 2016, according to a 2017 report by the Incentive Evaluation Commission. Companies must achieve an average wage threshold and $2.5 million in new annual payrolls within three years to qualify. Incentive payments cease if a company's gross payroll doesn't meet requirements. Payments also may be suspended if the average annualized wages fall below the statutory criteria.

Aren't there incentives specifically tailored for manufacturers who increase their payroll?

Yes. A property tax exemption for up to five years exists for new, expanded or acquired manufacturing facilities. Last year, nearly 200 manufacturers in 53 counties qualified for $161.2 million in exemptions, according to a tax commission report. The tax code requires manufacturers to maintain or exceed the base payroll amount established for the calendar year its assets were placed in service. During what has been called the Great Recession of 2008, the commission disqualified a manufacturer from the property exemption for failing to meet the payroll requirements, ruling that "ameliorating factors ... due to the current economic crisis are equitable in nature and are not grounds for waiver of the payroll requirements ..."

What about income tax credits that businesses may claim based on the creation of new jobs?

Oklahoma allows an income tax credit for either an investment in depreciable property used in a manufacturing facility, qualifying aircraft maintenance facility, or qualified web search portal facility or for a net increase in average levels of employment in any of these facilities. The credit is allowed in the first year of investment or net increase in employees, and for four subsequent years. For 2016, 245 businesses claimed the credit while reporting total capital investment of $2 billion and 737 new jobs, according to a 2018 evaluation report. Nearly all of the credits, 98%, were claimed for capital investments. The new employee credit only is allowed in the four subsequent years if the level of new employees is maintained, based on the monthly average number of full-time employees for the final quarter of the taxable year, compared with the prior year.

Do any of the sales tax exemptions depend on a purchaser maintaining a certain number of employees?

A refund of sales and use taxes paid exists for qualified purchasers engaged in computer services, data processing or research and development. To qualify, the Oklahoma Research and Development Incentives Act provides that the business must add and maintain, for a period of at least three years, at least 10 new full-time in-state employees with an average annual salary of $35,000. Amounts refunded must be paid back if the number of new employees drops below the prescribed number.

Are there any legislative measures under consideration that would prevent businesses from losing these incentives?

Yes, Senate Bill 1075, which passed the State Senate on May 13, provides that recipients of Quality Jobs Program incentive payments that fail to meet their payroll requirements from April 1 through June 30, 2021, will continue to receive their incentive payments. The bill doesn't address manufacturers that may lose their annual property tax exemption or the loss of income tax credits.

Paula Burkes, Business writer

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