The Tribune Democrat, Johnstown, PA

February 9, 2013

Initiative geared to business growth: Official: Jobs are benefit, not priority, of tax credit

John Finnerty
CNHI Harrisburg Bureau

HARRISBURG — The first goal listed on the website of the Greater Susquehanna Keystone Innovation Zone is: Create jobs.

But the annual report given to the state on the innovation zone program makes no attempt to describe how many jobs were created by the initiative even as the state forgave more than $13 million in taxes for 179 businesses last year.

Creating jobs is not necessarily the top priority of such KIZs, rather it is a presumed benefit of a program that is primarily geared toward helping young businesses prosper and grow, said a spokeswoman with the Department of Community and Economic Development, the agency that oversees the program.

“While there aren’t any job creation or retention requirements in the program legislation, the tax credit helps foster innovation, investment and job creation by aligning the combined resources of educational institutions, the private sector and businesses to create good-paying jobs for graduates,” said Theresa Elliot, deputy press secretary for DCED.

Rather than demand that companies use the government assistance to directly hire new employees, the program was structured so that companies can use the money any way that will help the business increase revenue.

The state authorized DCED to hand out $25 million in tax credits a year through the innovation zone program, but the $13.7 million awarded in 2012 was essentially all that businesses sought. The state received 181 requests for tax credits under the program and approved all but two of them.

There are innovation zones created across the commonwealth that are connected with universities.

There are 10 innovation zones designated around the state.

The program allows a company to reduce its tax liability by up to the amount of the tax credit. If a company’s tax credit exceeds the amount the business owes in tax, the difference can be sold to another taxpayer.

The Keystone Innovation Zone legislation, passed in 2003, does not stipulate how a company must use the proceeds from the sale of its KIZ tax credits.

Elliot said that the aim was to provide businesses “the flexibility to decide how best to accelerate the growth of their technology-based companies.”

Some companies may use the money to hire employees, but others may use the tax credit proceeds to buy equipment or deal with other costs, including protecting their intellectual property, she said.

Companies must provide data to the state demonstrating that their gross revenue has increased.

“If they are not growing and increasing the value of the company, they won’t qualify for the credit.  This is the ultimate measure of the program’s success,” Elliot said.

In 2010, the state Legislative Budget and Finance Committee conducted a review of a number of tax credit programs, and while the innovation zones were not the focus of the study, they were included.

The study’s authors ultimately determined that because tax credit programs involve forgiving taxes rather than spending state money, they tend to be given little scrutiny to determine if they are effective. In many cases, such as with the innovation zones, the economic development tax credit programs include no specific provision requiring that businesses use the assistance to directly create jobs.

But there are certainly fans of the program, particularly among the businesses that have used it.

Officials at companies that have used the program say the innovation zone tax credits are the exact kind of economic development tool that the government ought to be employing.

“Thanks to the Keystone Innovation Zone Tax Credit program, our company was able to create jobs,” said Janet E. Stout, director of Special Pathogens Laboratory in Pittsburgh.  

“The program is a wonderful example of how a state program can support and grow small Pennsylvania businesses, ensuring their success.”  

Optical Filters, a company with 50 employees in Meadville, Crawford County, used the assistance provided by the tax credit program to help it expand since the business was founded in 2004.

“As with most growing businesses, cash to support expansion is an essential ingredient.  The KIZ tax credits have helped Optical Filters develop by contributing working capital and, in turn, allowed it to grow faster than otherwise possible,” said CEO Nicola Dent Fisher.

Optical Filters used a tax credit to help with $320,000 worth of raw material stock as the company geared up to begin serving as a vendor to another U.S. manufacturer.

Critics of tax credit programs say that efforts like the innovation zones and the similar Keystone Opportunity Zones – which are tax-free zones typically in industrial parks – ought to be scrapped in favor of tax reforms that benefit everyone.

“Our view would be that you should get rid of these type of targeted incentives, which we see as corporate welfare, and then use that money to lower the overall tax climate to benefit all businesses instead of just some companies,” said Nathan Benefield of the Commonwealth Foundation, a free-market think tank.

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