What Are These Scams and Risky Subsidies? Why Should I Care About Them?
Big Income Tax Loophole: How’d you like to be able to transfer your taxable income to a state like Nevada or Delaware, rename it “passive income,” and pay no income tax to any state? That’s exactly what thousands of companies do with the profits they make in 19 states that have still failed to plug this loophole. Companies create “Passive Investment Companies” in Delaware or Nevada. These “PICs” then charge royalties for the use of company logos, trademarks, and other intellectual property. These royalties reduce or eliminate the taxable profits the companies would have had in the 19 states, and Delaware and Nevada call such money “passive income” and do not tax it. The solution: Combined Reporting. See more on this issue here.
Single Sales Factor: How’d you like to change the way you compute your taxable income so that your state income tax bill drops 80 or 90 percent? All in the name of jobs, of course, except you don’t have to create—or even retain—any jobs. That’s Single Sales Factor, the outrageous deal some large manufacturers and mutual fund companies have lobbied for and won in 20 states, most recently New York and California. Not included is Mississippi, where Single Sales Factor use is limited to manufacturers who sell direct to retailers and consumers. Small companies that sell locally don’t save a nickel; it’s a windfall for the big boys. When Illinois adopted Single Sales Factor, the state’s revenue department estimated that just five big companies would get 63 percent of the tax-break dollars. See more here, and read up on how to research single sales factor and other tax formula changes here.
Film/Media Production Subsidies: Producing films is risky, and Hollywood is notorious for its creative accounting. So how'd you like to get a tax credit worth 30, 40 even 50 percent of your expenses in the state where you shoot? A tax credit far bigger than the income tax bill you will ever owe that state, so you can sell the credit to another company or get a cash refund. In a classic zero-sum game, about 42 states now offer subsidies for film and/or digital media production totaling more than $1 billion per year. Many subsidized films expose teenagers to smoking; indeed movies are considered the biggest media pushers of tobacco now that most advertising is banned. Yet some states spend more subsidizing films with smoking than they do on programs to help people avoid or quit smoking. See more here.
Vendor Discount: In an arcane bit of tax history dating back to the Great Depression, 26 states allow retailers to keep a little of the sales tax they collect as a sort of handling fee—at a total cost of $1 billion per year in lost revenue! Thirteen of those 26 states do not cap the amount any retailer can keep, so mega-retailer Wal-Mart alone pockets an estimated $60 million a year. The biggest losers are Illinois, Texas, Pennsylvania, Colorado, Florida, Virginia, Ohio, New York, and Georgia—each loses more than $50 million a year. See Skimming the Sales Tax.
Tax Increment Financing (TIF): TIF is the most consistently controversial subsidy we find in our work. Founded with noble intentions—diverting local property taxes to help revitalize slums—it has in many states mutated into a massive subsidy for politically connected developers. Trouble is, those big tax diversions are undermining school funding, as shown in our 2003 and 2021 reports on tax abatements and education. Plus TIF deals often fuel suburban sprawl. And some states don’t even pretend to target TIF to needy areas anymore: Virginia allows TIF districts anywhere they can “promote commerce and prosperity.” Read more about research TIFs in our Researcher's Guide here.
CAPCOs or Certified Capital Companies: These are an outrageous subsidy gimmick cooked up by Louisiana insurance lobbyists in the early 1980s that have since been enacted in at least 8 more states and the District of Columbia. CAPCOs might also be described as pseudo-venture capital programs; they generate easy money for insurance companies but don’t require any job creation.
Unregulated Site Location Consultants: Site location consultants are the secretive middlemen involved in most of the high-profile cases where a company pits states against each other or commits “job blackmail” by threatening to leave a city or state unless a big retention subsidy is granted. One of the most powerful yet least well-known consulting industries in America, they date back to 1936, when the Fantus Factory Relocating Service was founded. Today there are hundreds of such firms, and some work on commission, pulling down as much as 30 percent of subsidies they negotiate for footloose companies. Some people think site location consultants should be registered and regulated as lobbyists. See more here.