Tax preferences are a category of subsidies provided through the tax system and can come in a variety of forms. Each of them provides a specific industry or company a tax benefit by either exempting them from certain types of taxation or by allowing a company to pay a lower tax than a company that is similar in all or most respects except for the fact that the government chose not to subsidize it through preferential tax treatment.
As noted previously, tax preferences should not be confused with broad-based tax policies that result in lower general tax rates. Broad-based policies apply equally to all businesses and can be utilized by any company that has tax liability. Examples of broad-based tax policies are the lowering of general business tax rates and creating tax deductions and exemptions that most businesses could benefit from. Preferential tax treatment, on the other hand, only impacts specific businesses, usually those that have been deemed by politicians or bureaucrats to be critical to the local or state economy or deemed necessary to meet some other policy goal.
Tax credits directly reduce the amount of taxes that a company owes. They are often awarded to a business that undertakes a specific activity, such as an expansion of their operations or the creation of a specific number of new jobs in a state. Tax credits are usually designed to favor a specific type of company, i.e. those operating in a certain type of industry or in a certain location.
Tax credits can also result in direct taxpayer-funded subsidies to companies, when credits exceed the company’s tax liabilities and the credits are made refundable. Other credits are transferrable, and allow the businesses that earn them to sell the credits to other businesses.
An enterprise zone is a preferential tax policy intended to lure companies to a specific geographic area within a state through a lower tax burden for the relocated company facility. If a company locates in one of these zones — some of which may, but not necessarily, be in blighted urban areas — they can receive favorable tax treatment, such as property tax abatements or lower effective tax burdens on other taxes, such as a corporate income tax. This policy was originally proposed by Jack Kemp as a way to demonstrate the economic strength of an area with limited government and low taxes. The limited government part has been entirely neglected with the policy now morphed into a special privilege scheme for supposedly blighted areas.
A close cousin to enterprise zones, tax increment finance districts, or TIFs, redirect a portion of taxes owed to a polity by the taxpayers in a defined region. When a TIF is designated within, say, a city, the taxes that would be generator for the city’s general fund from a particular district are limited for a time, often for multiple decades. The tax revenue generated from this district that exceeds what is owed the city can then, in some cases, be used for corporate welfare. The result is a small area relatively rich in collective resources that often give it a competitive edge, especially in places like Oklahoma where districts can only be created by cities and counties, but can access school property taxes. In some cases, ostensibly for blighted areas, TIFs are sometimes applied to just a single property.
Property tax abatements are offered by some localities or states for specific businesses and industries. They are a way of offering lower property tax rates for certain properties. These tax incentives impact other property taxpayers who are not able to receive the same favorable property tax treatment in a very direct way. Because the property tax base of a locality — which often is tethered to a specific set of budget categories, such as school funding — is subsequently reduced as a consequence of these property tax abatements, it could have the effect of increasing property taxes for everyone else, higher than they otherwise would be. In some cases, this situation may also result in an actual tax increase on nonfavored property owners. Abatements in Texas, which can be forthcoming from school districts, are a close cousin to TIFs since abatements only occur within designated “reinvestment zones” and are limited to 10 years. In Fort Worth, abatements have been granted to corporations like Coca-Cola, American Airlines, Bell Helicopter and Blue Cross Blue Shield.
Finally, sales tax exemptions exclude certain categories of goods or certain transactions from all or a portion of state sales taxes as a way to encourage a business to relocate to a state. In some cases, some part of sales tax collections is refunded to the businesses that collect them as an incentive for those businesses to locate in a specific area. Such arrangements would likely be most attractive to larger companies that would have a substantial sales tax burden otherwise, such as large retailers like Walmart or other big-box chains. Of course, the sales tax burden is actually paid by customers, and it is their tax remittances being returned to these retailers. In Arizona, such arrangements have been judged to run afoul of the state’s “gift clause” — a prohibition on government granting gifts to corporations.
In some states, calculations of foregone revenue performed by legislative budget offices and departments of revenue would rank sales tax exemptions as much more generous than the direct grant programs that those states offer. Many of these calculations, however, include exemptions for such items as plant equipment. This is actually just good tax policy since it prevents “tax pyramiding” (explained more fully below) and should not be considered corporate welfare or even a tax exemption.