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Income tax credit for business pushes the job creation button

Kris Ormseth//August 27, 2014

Income tax credit for business pushes the job creation button

Kris Ormseth//August 27, 2014

Kris OrmsethIdaho’s new Reimbursement Incentive Act has been in effect for just over a month and already has resulted in more businesses considering Idaho for potential expansion projects. The program creates a tax credit for businesses with a qualifying project that adds full-time jobs that are at or above the average wage.

The new Act has some technical requirements, but the basic concept is this: first, a business approved for the new incentive pays all applicable state taxes up front. Once the business demonstrates that it has actually created the required number of new jobs (20 in rural areas and 50 in urban areas), the state then reimburses it for a portion of the incremental tax revenue the state has already collected because of those new jobs.

The new legislation was passed by the 2014 Legislature in an effort to stimulate the creation of high-paying jobs. Idaho’s employment market could definitely use a boost. The median hourly wage for Idaho workers in 2013 was $14.68. Many of our neighboring states do significantly better: median wages for the same period in Oregon were $17.24, Washington $19.67, and Utah $16.00. Cost-of-living advantages may soften the impact of those differences somewhat, but few would likely argue with the goal of bringing more high-paying jobs to working Idahoans.

Here’s an illustration of how the new law works. Let’s assume there’s an engineering firm with a main office in the Boise Valley but with satellite offices in several other states. The firm has been growing and needs to add 30 professionals – engineers, CAD operators, draftsmen, etc. – to support its work on projects throughout the U.S.

If the firm simply hired that number of new workers in Boise, it would not qualify for the incentive because the minimum number of new jobs is 50 for urban areas. However, let’s assume the firm also consolidates one of its existing out-of-state offices and moves 35 professionals from that office to the Boise headquarters. The 30 newly created jobs, plus the 35 jobs that currently are out of state but will be moved to Idaho, can be added together to satisfy the minimum 50-new-jobs requirement.

The economic impact of this expansion might look like this:

Item Total Amount New State Revenue

New annual Idaho corporate income $6,000,000 $444,000

Annual aggregate wages for new employees (avg. salary of $60,000) $3,900,000 $273,000

Annual taxable purchases of goods to support new employees $100,000 $6,000

Total: $10,000,000 $723,000

If the tax incentive terms negotiated between the firm and the Department of Commerce were, say, 25 percent for 10 years, then the firm would receive $180,750 per year for 10 years (25 percent of the aggregate $723,000 in new income and sales tax revenue).

The total money available to our hypothetical business – almost $1.9 million over 10 years if it hires and relocates in Idaho – can make a difference in attracting new employers to Idaho. In an email exchange, Clark Krause, executive director of the Boise Valley Economic Partnership, informed me he has already seen a significant increase in the number of out-of-state companies conducting site visits in Idaho for potential expansion projects since the Act went into effect.

Krause, one of a number of early supporters of the bill along with Department of Commerce Director Jeff Sayer, added he is confident that the new act “will end up being the tool that changes the state for years to come as a competitive national player” in the competition to attract business growth. Prior to passage of the Act, Krause stated that Idaho “just did not compete for the most desirable” business expansion opportunities.

On a final note, the law has several important restrictions designed to make sure the state gets a good bang for its buck.

First, the amount of the reimbursement is established in an individualized agreement negotiated between the company and the Department of Commerce. That agreement will take into account the total economic benefits the state will receive from the business expansion as well as the percentage and duration of incentive that is required to bring the expansion to Idaho. The maximum credit a business can receive is 30% per year for 15 years, although some businesses may be granted an incentive at a lower percentage and/or shorter duration.

Second, reimbursements to companies are made only against tax revenues actually paid to and received by the state. Every year before a company receives a reimbursement it will have to demonstrate to the Department of Commerce, for example by providing copies of tax returns and other documents, that the state has actually received the tax benefits from the business expansion.

Authored by Kris Ormseth, a partner at Stoel Rives LLP. Kris is a member of the firm’s Economic Development practice group and is chair-elect of the Boise Metro Chamber of Commerce.