Tax Incentives for Economic Development: What are tax incentives for economic development?
The Federal Government has often used the tax system to partner with the private sector for economic development initiatives. A variety of tax expenditures aim to lure or keep companies and sectors within the United States. In addition, a more coherent set of incentives supports private investments in specific communities. Traditionally, these tax incentives have been tied to low-income communities, with few restrictions on the type of business claiming them. Often, they subsidize property development in targeted areas or the employment of those living there.
- Three basic kinds of tax benefits encourage economic development.
- The Work Opportunity, Empowerment Zone, and Renewal Community Tax Credits offer credits to businesses for hiring workers from targeted underemployed groups.
- The New Market Tax Credit and provisions related to Empowerment Zones and Renewal Communities offer tax subsidies for investing in low-income communities.
- The Low-Income Housing Tax Credit subsidizes the construction of affordable rental housing for low-income families.
- The revenue cost of tax incentives for economic development is low when compared with other tax expenditure programs. For example, tax expenditures on community-based initiatives will total an estimated $45 billion from 2008 to 2012; in contrast, the mortgage interest deduction will reduce revenues by an estimated $444 billion over the same period.
- Opponents of these programs argue that the incentives merely subsidize hiring or development that would have occurred in their absence, and that they shift funds away from other investment opportunities.
- Tax relief plans enacted in the aftermath of September 11th and Hurricanes Katrina, Rita, and Wilma have built upon existing community-based tax expenditures. These bills expanded coverage to disaster areas and victims and created additional incentives to assist state and local governments in financing private recovery efforts.