BCS Incentive and Finance Program Training

Welcome!

Primer - Agenda

• Learn about the Division of Business and Community Services

• Focus on BCS Tools (versus all DED/local tools) • Purpose • Types of Incentives and Finance Tools • Understanding “tax based” incentives and finance

programs requires understanding the State tax base. • There are types of taxes that are used as incentives

and finance programs. • There are different ways to “use” those tax types. • This session is an overview of those.

Division of Business and Community Services

(BCS)

• Multiple Divisions in the Department of Economic Development

• “development” versus “regulatory” divisions – Business and Community Services – Workforce Development – Energy – Tourism – Missouri Development Finance Board – Missouri Housing Development Commission – Arts Council – Public Service Commission – Office of the Public Counsel

“BCS”

…….Making Missouri a great place to live, work and play…..

Deploying technical and financial assistance to

Missouri businesses, local governments, community organizations, non-profits, and private developers, and

Supporting our partners at the federal, state, regional and local level working to

achieve the same outcomes.

“BCS” Strategies

• Business Development – New business recruitment – Existing business expansion and retention – Entrepreneurial development and new business start up – International export and trade and foreign direct investment

• Community Development – Modern infrastructure – Community facilities – Community services – Sustainability and viability

• Redevelopment • Environment • Housing • Volunteerism/Youth development

BCS Office of Business Development

• Business Development Specialists • Regionally assigned

• Responsible for facilitating new jobs and investment through business expansion and retention activities

• Provide technical assistance to Company and Community

• Support local Economic Developers

• Work with BCS Finance Offices to coordinate any Missouri incentives into a proposal for a company

• Liaison with the company with other state agencies (e.g. permitting from DNR, transportation with MODOT, etc.)

BCS Office of International Trade and Global Offices

• Promote Missouri products and services globally

• Increase the number of Missouri businesses exporting

• Increase the volume of Missouri exports

• Facilitate international business opportunities

• Assist with attraction of Foreign Direct Investment (FDI)

MITI Staff & In-State Regions

Region 1:

Paola Coronel

John Hensley Paola Coronel

Region 3:

Region 6:

Ruth Tucker

Region 2:

Yan Li

Region 4:

Region 5:

Doug Potts Yan Li Tim Schnieders

Region 7:

Silvia Rozas

Leslie Fischer

Global Office Network

Missouri Exports: Sector

2015 total export transactions: $13.6B

Missouri Exports: 13.6B (2015)

Missouri Exports: 13.6B (2015)

BCS Offices of Finance and Compliance

• Oversee and administer 30-plus state and federal incentive and finance programs.

• Review applications, determine eligibility make funding recommendations.

• Participate with BCS Business Development and Missouri Partnership to create proposals.

• Track and record program caps. • Track and record project awards, authorize draws

and issuances. • Track project activities and goals. • Produce reports for Governor and General Assembly.

BCS Office of Research - MERIC

• The Missouri Economic Research and Information Center (MERIC) is the research arm of the Division of Business and Community Services but supplies information to other Divisions, Departments, the Governor, Legislature and MO communities. MERIC consists of two units: The Labor Market Information unit and Economic and Workforce Research unit. Both units are funded by the U.S.

Department of Labor.

Regional Profiles

Economic Indicators

Industry Studies

Learn More and Keep Up E-Learning Webinar Modules

BCS Office of Marketing

• Serves as Communications office for department and division (press releases, electronic newsletters, Twitter, Facebook).

• Produces and publishes all print, video, and website material used by BCS.

• Responsible for purchased and earned media. • Plans and manages all media events (ribbon

cuttings, ground breakings). • Plans and manages annual Governor’s

Conference.

BCS Office of Rural Development

• Develop strategies for sustainability and viability of rural communities.

• Collaborate with federal and state agencies with rural development missions and tools.

• Promote Rural Development initiatives.

• Provide direct technical assistance to rural development local government and community organizations.

BCS Office of Community Engagement

• Develop strategies for economic growth in areas of high unemployment, dis-investment and poverty.

• Create access, familiarity and opportunity to DED resources by providing direct technical assistance.

• Promote diversity within MO communities.

• Represent DED in collaborative initiatives such as the Promise Zone, Choice Neighborhoods, and Smart Cities.

Division Contracts, Components, Partners, Commissions

• Missouri Partnership – new business recruitment

• Missouri Technology Corporation – entrepreneurship and new business start ups

• Office of the Military Advocate – base relations, economic impact, community development, BRAC.

• Missouri Community Service Commission – AmeriCorps, VISTA and other volunteer networks

• Small Business Regulatory Fairness

Board – liaisons with rule making and impact on small business.

Mastering Finance and Incentives

• Knowing what is available……

• Knowing when to apply a specific tool……

• Knowing how to access the tool…….

• Knowing how different tools work together…….

• Knowing how to use the tools to achieve your goals……

Purpose of Incentives/Finance

• Achieve social and economic goals:

– Improve Quality of Life

– Create/retain jobs

– Develop distressed areas

– Create new tax base

• Spur private investment

– Public funds – least amount to cause project.

– “But-For” test using public funds.

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Incentive vs. Finance Programs

Incentive Program

• An incentive is a tool provided for the purpose of enticing a specific behavior.

• An incentive may have requirements to earn it but rarely has requirements for use, once earned.

• MO deploys “performance based” incentives (activity must occur before benefit is paid)

Finance Program

• A finance tool is one which has a place on a project budget. It is a source and typically has a specific use.

• Most MO finance tools are “gap fillers”.

• All tools generally employ the “least

amount

necessary”.

Different Types of State Tools

• Grants – a cash payment with no expectation of

repayment. – Public purpose/public benefit (MO Constitution)

• Loans – a debt instrument – Commercial versus government

• Risk/Market • Public benefit

• Equity Investments – an investment for shares or partial ownership

• Free or Reduced Land • Technical Assistance • “Tax-based” Tools

Understanding “Tax-based” Programs

Types of Taxes in MO

• Personal Taxes – Individual Income

– Fiduciary

– Estate

– Partnership

– Property

Bold indicates use in incentives and

finance programs

Understanding “Tax-based” Programs

Types of Taxes in MO • Business Taxes

– Cigarette and other tobacco – Corporate Franchise – Corporate Income – Financial Institution – Motor Fuel – Partnership – S Corporation – Sales/Use

Bold indicates use in incentives and finance programs

2016 Tax Revenues by Type Sales and Use Tax $2,102,633,661 21%

Income Tax - Individual 7,158,240,866 70%

Corporate Income and Franchise Tax 468,289,023 5%

County Foreign Insurance 247,270,230 2%

Liquor 24,760,965 0%

Beer 7,798,378 0%

Inheritance/Estate 56,183 0%

All Other Taxes 30,018,949 0%

Interest 4,688,248 0%

Licenses, Fees, & Permits 85,564,867 1%

Sales, Services, Leases, & Rentals 7,693,354 0%

Refunds 9,126,046

Interagency Billings/Inventory 166,281

All Other Receipts 45,428,475

Total Collections $10,191,735,525

Total Collections Net of Refunds $8,786,773,095

Corporate Income Tax

• State set at 6.25% of net taxable income earned by a business in MO

• Allows a 50% of federal income tax payments to be deducted before computing taxable income

• Creates an effective tax rate of 5.2%

Sales/Use Tax

• State sales tax is 4.225% (3% of which is GR). • About 35th in the nation. • Local sales/use taxes range ½-1%. • County sales/use taxes range ¼ - 1%. • Sales tax occurs at purchase, sale or lease. • Use tax occurs when tangible personal

property comes in to state and is stored, used or consumed in MO.

• About 12 major sales/use tax exemptions on MO books.

Property Tax

• Set and administered locally • Little comparison among states

– Assessment ratios differ – Tax levies differ among cities – Assessors differ in valuations

• Mo assessment ratios – Tangible personal property = 1/3rd true value – Real property (land and building)

• Commercial and industrial 32% • Residential 19% • Ag 12%

Franchise Tax

• Based on capital employed in a company

• Rate = 1/30 of 1% or $0.33 per $1000 par value of outstanding shares and surplus or total assets

• Corporations with less than $1M not taxed

• Based on receivables, inventory, land and fixed assets in MO.

Individual Income Tax

• Sliding percentage scale based on income

• Higher the income, higher the percentage of “withholding”

Adjusted Gross Income and Approx % Tax AGI of $15 – 20,000 1.27% AGI of $20 – 25,000 1.82% AGI of $25 – 30,000 2.29% AGI of $30 – 35,000 2.63% AGI of $35 – 40,000 2.85% AGI of $40 – 45,000 3.00% AGI of $45 – 50,000 3.11% AGI of $50 – 55,000 3.21% AGI of $55 – 60,000 3.31% AGI of $60 – 65,000 3.40% AGI of $65 – 70,000 3.49% AGI of $70 – 75,000 3.57% AGI of $75 – 100,000 3.78% AGI of $100 – 200,000 4.29% AGI of $200 – 500,000 4.82%

Turning Taxes into Incentives and Finance Tools

• Tax Exemption – the elimination of the obligation to pay the tax (permanent or for a fixed period of time)

• Tax Deduction – the lowering the taxes due

• Tax Deferral – delaying or postponing the tax due

Bold indicates use in incentives and finance

programs.

Tax Deduction is the newest (SB 861)

Turning Taxes into Incentives and Finance Tools

• Tax Diversion – diverting or transferring the collected taxes to a special fund or account to pay for specific costs

• Tax Abatement – a reduction or exemption from all or part of property taxes for a specific period

• Tax Credit – reduction or elimination of tax liability (note difference between credit and deduction)

Turning Taxes into Incentives and Finance Tools

• Use of exemptions, abatements, credits, and tax diversions is provided in State Statute and grounded in Constitution – Authorizes certain entities – Authorizes certain circumstances – Authorizes certain time periods

– Example: Taxes under TIF cannot be abated for

more than 23 years (Chapter 99, RSMo). – No abatement shall occur for more than 25 years by

Article 10 Section 7, MO Constitution

Cost of Doing Business In MO

• Low tax base state

• Multiple permanent exemptions (example: sales tax for manufacturers)

• Evolving statutory authorities aimed at reducing project costs while achieving public purpose using taxes

How Did We Get Here?

– Constitutional prohibition of providing public funds to private business for private purpose

– 1990’s Hancock refunds resulted in multiple tax credit programs – desire to not collect tax

– Statutory authorities are not appropriated in budget process (provides more standard year to year availability/certainty)

– Really smart people figuring out different ways to skin the cat.

Examples of MO Exemptions:

• Sales taxes paid by manufacturers • Feed for livestock and poultry • Fencing materials used for ag purposes • Railroad rolling stock for use in transporting

persons or property in interstate commerce • Products sold at farmers markets less than

$25,000 See the complete list at - http://dor.mo.gov/business/sales/sales-use-

exemptions.php#tab1

Examples of Diversions:

• State Supplemental TIF increment is collected and diverted to pay for eligible TIF costs

• CID, TDD, NID and economic development sales tax proceeds are a form of a tax diversion

Examples of Abatement:

• Property taxes under Chapter 100 are abated

• Property taxes under Chapter 353 are abated

• Property taxes in an Enterprise or Enhanced Enterprise Zone are abated.

Tax Credits

• Deeper dive into tax credits as incentives and finance tools

• The state has 50-60 tax credit programs • Approximately 30 are administered by DED • DOR, DNR, Social Services, Mental Health and Ag

also administer tax credits. • Tax credit programs are created by state statute. • Some tax credits are “certificated” and some are

a line completed on your tax return.

The Typical Life of a Tax Credit

• For certificated tax credits: – Application is received by agency and tax

credits are approved or authorized

– The awardee performs the eligible activity

– The Agency issues a certificate to the appropriate tax payer after verification of that activity

– The taxpayer turns in the certificate with his/her taxes and uses it to offset state tax liability

Tax Credit Approval Stages

• “Authorized/Approved”: – Application is approved for a specific amount of

credits

• “Issued” – Tax credit certificate is provided to the

applicant or appropriate taxpayer

• “Redeemed” – Credit is applied against state

tax liability

Example – Approval Stage

$10,000,000

$5,000,000

$3,500,000

$500,000

$2,000,000

$7,000,000

$1,000,000

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

$9,000,000

$10,000,000

FY05 FY06 FY07 FY08 FY09

Authorized Issued Redeemed

Project Authorized

Initial Issuance

Initial Redemption

The Value of Tax Credits

• Statutes set value (e.g. 15%, 25%, 50%, 100%, etc.)

• Statutes list which taxes the credits may be applied against

• Statutes set eligibility of taxpayer or non-profit

• Statutes determine “type of credit” (two main types with variances) – “Contribution credit”

– “Investment credit”

Contribution Credit

• Typically awarded to a non-profit for an identified project

• Non-profits use the credit to entice donations

• Donors are issued credit

• Credits can increase donation size since donor gains tax advantage

• Allows for taxpayer to direct use of taxes otherwise paid to state GR.

Contribution Credit

• Example: – Project involves construction of a $1,000,000 senior

center

– Senior Center non-profit has $100,000 loan and $400,000 in bank and needs $500,000 to complete budget

– Project is awarded $250,000 in 50% credits (which will raise $500,000) • Donor #1 donates $10,000 and received 50% credits for

his/her donation. Donor takes $5000 off

taxes at year end.

• Etc.

Investment Credit

• Credits are calculated and issued based upon percentage of eligible project costs or for percentage of eligible project activities. – e.g. Percent of rehabilitation costs on historic

property – e.g. Percent of payroll of new employees hired

• Investment credits are typically used with for–profit entities.

• Credits are issued to taxpayer applicant (as opposed to donor as a contribution

credit is).

Investment Credit

• Historic property has $1,000,000 of qualified rehabilitation expenses

• State historic credits are 25% of eligible QRE’s ($250,000)

Special Features of Tax Credits

Some are:

• Refundable – Credit issued in excess of taxpayers tax liability

can be refunded to taxpayer in cash

• Sellable and transferable – Credit can be sold to another taxpayer for cash

– New certificate is issued in new taxpayers name.

– Credit retains original

characteristics

Example – credit sale

• $10,000 in credits issued. Taxpayer sells all $10,000 to another taxpayer for .92 cents on the dollar. Buyer pays seller $9200 and gets $10,000 in credits

• Buyer redeems credits and reduces tax liability by $10,000 (face value of credit certificate)

• Seller pays income tax on $9200

• Seller gets cash NOW.

• Cash is king

Selling Credits

• Time of sale – “pre-sold” or after receipt • Sales price varies due to:

– Time value – Risk of non-performance – Limitations on redemptions – Supply and demand

• Who buys? – Brokers – Institutions – Wealthy investors

Special Features of Tax Credits (continued)

• Carry back – Credit can be applied to previous years tax returns

• Carry forward – Credit can be applied to future years tax liability

• Entitlement – Credits that are required to be authorized and issued

automatically if an applicant or activity meet statutorily-defined criteria.

• Discretionary – Credits that can be authorized at the discretion of the administering agency, often based on a competitive process.

Special Features of Tax Credits (continued)

• Expired – Credit has reached the end of its carry forward period.

• Expired-Redeemed – Credit has expired by statute but are nonetheless

redeemed by taxpayer filing an amended return • Certificated

– Credit for which the administering agency issues a paper “certificate”

• Clawback – Statutory or contractual provision enabling recapture of credits or their equivalent for failure to perform or non-compliance.

Special Features of Tax Credits (continued)

• Tax Credits Outstanding

– The amount of the State’s present liability for tax credits, which can be defined in two ways:

– Authorizations – Forfeited – Expired – Redeemed

– Issuances – Expired – Redeemed

• Forfeited

– Credit authorized but surrendered to the administering agency

Special Features of Tax Credits (continued)

• Caps – Mechanism by which the amount of tax credits are

limited or “capped,” including: • Program Cap

– Limit on the amount of tax credits available under the program, either annually or cumulatively

• Per-Project Cap – Limit on the amount of tax credits available to any one

project, taxpayer or donor under a particular program • No Cap

– Without a statutory cap, the default is that there is no limit on the amount of tax credits that may be authorized or issued.

Special Features of Tax Credits (continued)

• Sunsets

– Statutorily-defined period of time for which a particular tax credit program is authorized unless affirmatively reauthorized by the legislature.

• Streaming Credit

– Credit authorized for a project but issued over a period of years based on the achievement of specified benchmarks

More ED Finance Training • CDFA

– Council of Development Finance Agencies

• NDC

– National Development Council

• IEDC

– International Economic Development Council

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Questions?

Thank You!