One distinct difference is within their application. Incentives tend to be proactive, frequently offering non-tax benefits. Tax credits are reactive, sometimes resulting in a dollar-for-dollar reduction of tax liability. 

Economic incentives are offered as a way to assist and lure companies to expand within or relocate to a particular state, county, or city. Tax credits are also offered by states throughout the country, but mainly to allow established companies to lower their tax liabilities. 

Incentives are negotiable and are generally offered at the discretion of state or local economic developers. On the other hand, tax credits are statutory in nature and are available to all companies as long as the prescribed criteria is met. 

Many incentive packages include up-front tax credits as well as measures to reduce companies’ initial cash outlay for expansions and relocations. 

Although tax credits are not usually negotiable, several states allow credits to be claimed retroactively. Many also have favorable carry-forward provisions.

Common incentives

The most common types of incentives are tax increment financing, property tax abatements and enterprise zones.

Through a tax increment financing subsidy, municipalities provide capital to growing businesses to help with the costs of acquisitions, renovation, development or clearance of a site and other organizational costs. 

Tax abatements and credits are provided to companies moving into enterprise zones designated by city and state agencies. Empowerment zones are federally designated as an enhancement or alternative to incentives offered in enterprise zones. 

Other types of incentives include: fee waivers, special districts, utility rate reduction, infrastructure funding, job training funds, low-interest loans and rebate agreements.

An example of a tax incentive package is South Carolina’s five-year property tax abatement plan. This incentive can represent a 20 to 50 percent savings on a county’s total property tax rate.

Popular tax credits

The most common types of credits offered by states are: investment tax credits, research and development credits, job tax credits and enterprise zone credits. Investment tax credits are offered by approximately 35 states. 

Twenty-three states offer R&D credits. Other credits, such as job tax credits, are based on increases in payroll or employment. Enterprise zone credits promote activity within a designated area.

Other types of tax credits include: contribution credits, child care credits, training credits and environmental credits. 

An example of a tax credit initiative is Georgia’s Job Tax Credit program, which offers credits ranging from $500 to $2,500 per job created, depending on the location of the facility.

Clawbacks and recaptures

Companies that take advantage of incentives and credits, however, should realize that they have to uphold their end of the bargain as well.

States and communities can use “clawback” and “recapture” policies to reduce or cancel benefits or require repayment if, for example, contractually-agreed-upon jobs don’t materialize.

Although there are differences between incentives and tax credits, they both benefit states, local governments,  and your business.