onsultant: We need to check and see if you are located in any Economic Development Zones.
Client: We aren’t. I already checked the federal Enterprise Zone maps.
Consultant: Federal Maps. Do you mean Enterprise Communities?
Client: Maybe it’s Empowerment Communities?
Consultant: That’s Empowerment Zones.
Client: Back to Enterprise Zones …
Taxadvantagegroup llc maintains a database of federal and state incentive programs, IncentivePro. To date, the database documents over 3,200 incentive programs, approximately 20 percent of which are location-specific.
While the nomenclature is often confusing, location-specific incentives can be segmented as follows:
1) Enterprise Zones and Targeted Areas
2) Declining Geographic Areas
3) Industry-Specific Areas
4) Tax Increment Financing Areas
5) Tax Free Areas
6) Federally-Designated Areas
Enterprise Zone (“EZ”) – noun – “An impoverished area in which businesses are exempt from certain taxes and are given other economic advantages as an inducement to locate there and employ residents.”
One half of states have location-specific incentive programs called EZs. Many of these programs were originated around the time the federal enterprise zone [EP1] program was enacted in 1994. Generally, EZs offer a package of incentives for blighted areas, from tax credits to extended Net Operating Loss (“NOL”) carryovers, which requires some level of investment or job creation in order to participate.
Enacted in 1984, California’s EZ Program is often identified as the most lucrative in the United States. The package of EZ incentives includes:
• Employee Wage Credit,
• Machinery and Equipment Sales Tax Credit,
• Expense and Property Deduction,
• NOL Carryover, and the
• Net Interest Deduction.
In addition to EZs, at least 15 states have targeted areas with names such as Strategic Investment Areas, Targeted Tax Areas and Development Zones. In fact, in addition to EZs, California also provides benefits to businesses located in:
• Los Angeles Revitalization Zones,
• Local Agency Military Base Recovery Areas (LAMBRA – enacted in 1993),
• Targeted Tax Areas (TTA – enacted in 1998),
• Manufacturing Enhancement Areas (MEA – enacted in 1998).
EZs and other Targeted Areas are effective for a time period specified by statute. For example, California EZ designations are effective for a 15-year period while North Carolina Development Zones are effective for a 24-month period.
In addition to impoverished areas defined by blight, states also provide incentives to geographic areas in a current state of decline. These areas may include: Rural, Urban, Tobacco Dependent, Border Locations, Former Military Bases, Brownfield Areas, or Disaster Areas.
In addition to 56 state-designated EZs, Florida provides location-specific incentives for the following declining areas: Rural Counties, Urban High-Crime Areas, and Brownfield Areas. A Rural Job Tax Credit, equal to $1,000 per job created, is provided to certain businesses. A rural area means “any area that is contained within a rural area of critical economic concern, a county that has a population of fewer than 75,000 persons, or any county that has a population of 100,000 or less and is contiguous to a county that has a population of less than 75,000”. The rural areas are selected by the Office of Tourism, Trade, and Economic Development (“OTTED”) and are based on the following factors:
1) Highest unemployment rate for the most recent 36-month period,
2) Lowest per capita income for the most recent 36-month period,
3) Highest percentage of residents whose incomes are below the poverty level, and
4) Average weekly manufacturing wage.
An Urban High-Crime Area Job Tax Credit, equal to up to $1,500 per job created, is provided to certain businesses. A high-crime area is selected by the OTTED based on the following factors:
1) Highest arrest rates for violent crime and for such other crimes as drug sale, drug possession, prostitution, vandalism, and civil disturbances,
2) Highest reported crime volume and rate of specific property crimes such as business and residential burglary, motor vehicle theft, and vandalism,
3) Highest percentage of reported index crimes that is violent in nature,
4) Highest overall index crime volume for the area, and
5) Highest overall index crime rate for the geographic area.
In addition, a qualified high-crime area also means an area that has been designated as a federal Empowerment Zone.
A Brownfields Redevelopment Bonus Refund, equal to up to a $2,500 per job created, is provided to certain projects. Brownfield area means a contiguous area of one or more brownfield sites, some of which may not be contaminated, and which has been designated by a local government by resolution. Such areas may include all or portions of community redevelopment areas, enterprise zones, empowerment zones, other such designated economically deprived communities and areas, and EPA-designated brownfield pilot projects.
States provide location-specific incentives, segmented by industry type. Current industries of focus include: Manufacturing, Aerospace/Defense, Agriculture, Health/Bioscience, Technology and Energy.
Michigan provides location-based incentives for both the Alternative Energy and Tool and Die Industries.
Michigan’s NextEnergy Zone is located near Detroit’s Wayne State University Campus. The enacting legislation provided that one available Renaissance Zone could be designated as an Alternative Energy Zone, having Renaissance status for a 20-year period. Eligible incentives include:
• Business Activity Credit,
• Payroll Credit,
• Alternative Energy Personal Property Tax Exemptions, and
• Other Renaissance Zone Benefits.
The Michigan Renaissance Zone Act was amended to allow the designation of up to 25 Tool and Die Renaissance Recovery Zones. As of December 31, 2006, 23 Zones have been designated. Qualifying tool and die companies, classified by NAICS codes, do not have to pay the following taxes for up to 15 years:
• Business Activity Credit,
• Single Business Tax,
• 6-mill State Education Tax,
• Local Personal Property Tax,
• Local Real Property Tax,
• Local Income Tax, and the
• Utility Users Tax (Detroit only).
Tax Increment Financing “TIF” is designed to help finance projects in either state- or locally-designated redevelopment areas, generally through the bonding of future tax revenues. Future tax revenues may include: real and personal property tax, sales tax and employment withholding tax. Currently, Arizona is the only state without a TIF law.
While some states, such as California and Illinois, have used TIF for several years, many others have only recently passed state laws that allow them to use this important tool. TIF legislation was most recently passed in North Carolina.
In 2004, North Carolina voters approved Self Financing Development Bonds. Constitutional Amendment One permitted local governments to issue bonds without a referendum for a variety of public improvements that businesses often require in order to locate in a community. The bonds are then financed with the increased tax revenues generated by those improvements.
In 2005, the definition of an eligible project was relaxed for tourism-related projects located in Tier 1 Counties.
Certain location-specific incentive areas are tax free. These include areas called Renaissance Zones and Keystone Opportunity Zones.
In 1999, Pennsylvania enacted the Keystone Opportunity Zone program that provides an opportunity to completely eliminate state and local taxes. Additional zones were added in 2001, 2003, and 2004. A company’s tax burden may be reduced to zero through exemptions, deductions, abatements, and credits for all state and local taxes. Current Zones expire in 2008, 2010, 2013, and 2018.
In addition to state-designated location-specific incentive programs, the variety of federally-designated programs is increasing. Federal location-based incentive programs apply to:
• Foreign Trade Zones,
• Native American Lands,
• Delta Regional Authority Areas,
• Appalachian Regional Commission Areas, and
• Gulf Opportunity (“GO”) Zones.
In addition, location-specific incentives are available for federal Empowerment Zones, Renewal Communities, Enterprise Communities, and New Markets Tax Credit Census Tracts.
Since the nomenclature is extensive and confusing, keep in mind the following:
1) Location-specific incentive programs are named not only Enterprise Zones, but also various Zones, Areas and Districts. Broaden your question from “Is my facility located in an Enterprise Zone?” to “Is my facility located in an area that offers tax advantages?”
2) Be aware of location-specific effective dates. The benefits for locations with shorter effective periods are riskier than for locations with longer periods.
3) In addition to poverty-based locations, there may be geographic areas of concern such as rural and urban areas.
4) Industry-specific areas exist both to support declining industries and to compete for growing industries
5) TIF areas may offset not only real property taxes, but also personal property, sales and employment withholding taxes.
6) Don’t forget federal benefits.
An important first step to secure maximum benefits for your company is to understand that many different types of location-based incentives are available in various and often overlapping geographic areas.
Tammy C. Propst is the president of taxadvantagegroup (“tag”) llc, a business incentive consulting firm. Shaun McCurry is an associate with tag (www.taxadvantagegroup.com).