Transferable tax credits can benefit buyers, sellers
Pennsylvania offers tax credits to spur many kinds of business activity. There are credits for film production, research and development, improving farms' environmental footprint.
But if the companies in question don't have a tax liability, tax credits won't do them much good.
The solution: Make the tax credits transferable, so companies that owe no tax can sell them to ones that do.
They have to find a buyer, of course. And that's where companies such as MVM Associates Inc. come in.
Montgomery County-based MVM Associates helps companies secure tax credits from the state, handling all the considerable paperwork involved. It then helps match tax credit sellers with buyers, often by bundling a number of sellers' credits together, founder and President Mike McCann said.
In March, MVM announced it had secured more than $8 million for more than 50 Pennsylvania technology firms by selling tax credits for them. Since founding MVM in 1997, McCann has helped companies sell more than $100 million in state credits, according to company promotional material.
Besides him, the firm has five employees, he said.
Most tax credits that can be sold do get sold, McCann said: He estimated 80 percent to 90 percent.
It's a competitive market," he said.
For the sellers, the transactions yield ready cash that they can use to capitalize their business. Buyers, of course, save on their taxes.
A typical sale price is around 90 cents on the dollar, McCann said. For $90,000 dollars, a large company could reduce its taxes by $100,000, for a return on investment of $10,000, or about 11 percent.
Where else would you invest $90,000 and get a $10,000 return, given today's returns?" McCann asked.
One local bank holding company, Lititz-based Susquehanna Bancshares Inc., bought $4.3 million in tax credits last year, said Paul Maulfair, vice president and tax director.
Susquehanna likes to do deals with its own customers when it can, but it buys other companies' credits as well, he said. The bank uses a third-party broker to handle the paperwork.
Banks are good customers for tax credits because their tax liabilities are fairly stable and predictable, Maulfair said. Tax credits have to be used in the year they are acquired, so they aren't a good buy for companies with unpredictable profits.
When a company sells a tax credit, it gets the money right away, rather than having to wait months until tax season to use it, Maulfair noted. That time differential is part of the rationale for trading them at a discount.
Pennsylvania tax credits apparently were a good buy for Apple Inc. last year. The cash-flush technology company bought 32 tax credits worth $2.33 million, the Philadelphia Inquirer reported, citing a Pennsylvania Department of Community and Economic Development report.
DCED said it approved 206 Keystone Innovation Zone tax credit transfers totaling $12.3 million in 2012.
Nationwide, around $5 billion per year in transferable tax credits are exchanged, Reuters estimated. Film credits are especially popular, with perhaps 30 states offering them, according to a Pew Charitable Trusts "Stateline" report.
Stephen Herzenberg, executive director of the left-leaning Keystone Research Center, said the organization is sympathetic to using transferable tax credits to encourage startups.
Nevertheless, the center advocates less roundabout programs, such as direct venture investment, as more cost-effective ways to accomplish that goal, Herzenberg said.
Critics of tax credit programs often say they lack accountability. A 2010 study of Pennsylvania's programs by the General Assembly's Legislative Budget and Finance Committee concluded that "little is being done to monitor or verify program results."
"Job creation and retention data, to the extent it is available at all, is typically self-reported, and we could find no evidence in the files we reviewed that DCED made any effort to independently verify this information," the report said.
Since that report, DCED has improved accountability significantly, and it continues those efforts, spokesman Steven Kratz said in an email.
DCED's Keystone Opportunity Zone coordinators will now develop a plan for each zone and will track and verify information such as jobs created and capital invested, he said. Accountability enhancements have been made to the Neighborhood Assistance Program and the Job Creation and Educational Improvement tax credit programs, he said.
"The Corbett administration is committed to invest in quality projects, but also to protecting taxpayer dollars," Kratz said.
At their root, tax credits are economic development programs,
"At the end of the day, they're all about adding jobs," he said.
Transferable tax credits in Pennsylvania
Some tax credits are transferable; others can be used only by the company that originally qualifies for them. The following five Pennsylvania tax credits are examples of those that can be bought and sold.
• Film tax credits
• Keystone Innovation Zone (KIZ) tax credits
• Neighborhood Assistance Program (NAP)/Enterprise Zone (EZ) tax credits
• Research & Development tax credits
• The Resource Enhancement and Protection (REAP) tax credit
Sources: MVM Associates Inc., Pa. Department of Community and Economic Development