By Laurence Sotsky, CEO of Incentify
Tax Credits & Incentives (C&I) are sometimes wrongly labeled “Corporate welfare” when in fact C&I stimulates critical innovation by mitigating the need for early profit. This allows companies to reach certain product thresholds before needing to reach profitability, take on dilutive capital, or rely on major loans. Additionally, the vast majority of C&I is comprised of tax abatement and offset (rather than direct liquidity) gated by strict compliance standards (rather than the very loose standards of the Paycheck Protection Program, for example).
That is to say, C&I is largely made of non-liquid expenditure by government bodies with an abundance of legal failsafes installed in the pursuit of innovation and other pro-societal activities. C&I could hardly be further from “corporate welfare,” as welfare requires recipients to maintain a certain level of need while C&I requires awardees to maintain a certain level of achievement.
Other public relations problems persist for C&I. For example, while I am a huge fan of the strength, grace, and rhetorical ability of Congresswoman Alexandria Ocasio-Cortez on display during speeches like these, I am equally compelled to point with great caution to a pervasive mindset the honorable Congresswoman often expresses regarding Tax Credits & Incentives (C&I). The Congresswoman’s objection can be paraphrased as such:
Any life-saving medication developed partially or in full through C&I belongs to the public, such that any and all resulting profit is immoral. Any large, profitable organization like Amazon or Tesla should be exempt from any C&I because they are owned by extraordinarily wealthy individuals. Essentially, C&I invalidates free market capitalism.
I understand the temptation to cherry pick certain facts and patch them together into a salacious story of backroom dealings between big government and big corporation - it’s an easy story to tell and one that rings very true with both voter bases (clearly, the “drain the swamp” motif from former President Trump hits very similar points). However, it not only is a false narrative, the proliferation of this false narrative is quite dangerous. Let me explain, and apologies to anyone with COVID themed article fatigue but this is the most immediate example:
All 3 FDA approved COVID vaccines were developed through significant C&I packages with either the U.S. and German governments just as Remdesivir and other COVID therapeutics were developed through C&I. To risk stating the obvious - we want COVID vaccines and therapeutics. Furthermore, the mRNA technology as well as the therapeutics were all developed long prior to the emergence of COVID-19 through long standing statutory C&I. Most notably are R&D Credits and the Orphan Drug Credit (which was halved in value through the 2017 Tax Act, greatly limiting its future impact.)
Beyond R&D, let’s look at another major area of C&I focus - hiring. The Work Opportunity Tax Credit (WOTC) alone accounted for more than 12,000,000 hires of historically disadvantaged populations between FY 2014 and FY 2019 in the U.S. And with a little known qualification clause for long term unemployment (defined as anyone who has not worked in more than six months,) WOTC along with other credits like the recently revamped Employee Retention Credit are poised to make a major impact in the major rehiring effort needed in 2021.
C&I is not the antithesis of free market capitalism, it is a cornerstone of it. C&I often bridges the gap between crisis and market profitability. To suggest that any company receiving C&I should no longer be able to pursue profit within the bounds of our market is reactionary and dangerous. Now, if the discussion is whether or not there is a serious problem with a wealth divide in our world? Of course there is! That is an important discussion and one which is distinct from the utility and profit viability of C&I.
Furthermore, C&I outcomes should be tracked across many of the same categories included under the broad header of ESG investing. Why shouldn’t a company which decides to open up a new factory in an Enterprise Zone, bringing with it 1,000 well paying jobs and receiving a 10-year property tax abatement, be considered under ESG guidelines? What was the impact to the local school district and the micro-economy of restaurants, laundromats, and SMBs surrounding the new factory? How much in local taxable revenue was put into the tax base net of the property tax abatement? The Investment Tax Credit and the Production Tax Credit are major levers for the renewable energy markets whose outcomes should be tracked in CO2 tonnage diversion and solar/wind wattage generated. There are certainly too many examples to bring up in this article.
In conclusion, capitalism is complicated and that’s a good thing. The checks and balances are organic rather than arbitrary or contrived as they are in autocracy. I would challenge Congresswoman Ocasio-Cortez (and for that matter, former President Trump) to abandon the over-simplified stories of corruption which paint deeply wrong and incredibly dangerous stories of a very complicated compact between the public and private sectors. C&I is a very valuable macro-economic tool in the ongoing effort to make the world a more fair, sustainable, and enjoyable place for as many people as possible.
Laurence Sotsky is the CEO of Incentify, an enterprise technology firm dedicated to realizing the financial and societal goals of Tax Credits & Incentives (C&I).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.