Behind the scenes in the world of tax incentives, there exists an established industry of tax credit brokers who convert state-issued tax credits into cash.
They solve a relatively simple financial problem that otherwise, in the absence of the tax credit brokerage industry, would inhibit the intended benefits and overall effectiveness of state tax credits.
The Problem Tax Credit Brokers Solve
In every state in the country, companies can earn state tax credits for pursuing activities that local governments deem to be desirable. Incentivized activities include research and development, investing in affordable housing, brownfield redevelopment, film production, historic rehabilitation, renewable energy work, business relocation and many other activities and investments that create jobs or otherwise stimulate the local economy.
In many cases, however, the companies that receive the state tax credits do not have enough state tax liability to use them, particularly in the early years of a project. Recognizing this reality, states have made many tax credits transferrable, giving rise to a small industry of tax credit brokers that helps sell these tax credits to buyers who will use them to reduce their own taxes.
Without the liquidity created by tax credit brokers, states would not be able to achieve their desired goals, because an unusable tax credit isn't much of an incentive.
Tax Credits Expert Shares Insights on the Industry, Predicts Industry Will Continue to Grow
To learn more about this market, we consulted with Jane Saul, the former Director of the Pennsylvania Film Office now working with Tax Credits, LLC, a nationally recognized tax credit broker, or "Placement Specialist" to use the industry's terminology, and asked her a few questions.
Jane, I understand you've been working in this industry for quite a few years. How did you get started in it?
Former Pennsylvania Governor Ed Rendell appointed me to be the Pennsylvania film commissioner back in 2003. I helped to create the state's Film Tax Credit Program, which was enacted in 2004. After many years of working in this area, I joined Tax Credits, LLC in 2014. It's a position that has allowed me to leverage my many years of experience in the industry with an established firm that has placed close to $800,000,000 million in various state tax credits with buyers and handled over 1800 transactions to date.
I understand that what Tax Credits does is bring liquidity to the market for transferable tax incentives. Is that right?
Yes. We enable the quick and efficient monetization of film tax credits for production companies, which allows them to move forward productively. In some cases, we are able to get them financing in advance of an award. On the "buy side", we offer appropriate tax credits to buyers at a discount, allowing them to reduce their tax bills in one or more states.
Is there a consultative aspect to what you do as well?
Yes. A big part of what we do, and the reason we are a go-to Placement Specialist for many companies, is that we've been doing this for 15 years, so we bring a lot of knowledge and consulting expertise to the table. Selling a tax credit for the highest applicable price is important, but we are also advising companies on which tax credits to seek out. In addition, we are advising states on how to structure their programs, and we are advising tax credit buyers on how they should approach the market.
That's great. Would you describe this as a mature market or an emerging market? Do most potential buyers and sellers know about this already, or is a big part of what you do educating the market regarding the fact that this is possible?
On the buy side, sophisticated companies and individuals with good tax departments are generally aware that they can buy these tax credits. Most Fortune 500 companies, for example, buy tax credits now. However, just five years ago, many buyers were not aware that they could improve their tax efficiency by purchasing tax credits at a discount. However, as state incentive programs become more "user friendly", more buyers are participating. Most importantly, the risk to the buyer has been practically eliminated. On the other hand, sellers in the film industry (production companies and studios), have known for a long time that they can convert a tax credit into cash value.
Interesting. One thing that that puzzles me is why the price of a tax credit doesn't get bid up to close to its actual value. If I can save $100,000 on my tax bill, shouldn't I be willing to spend something like $99,000 to get that value? My research suggests that a tax credit of $100,000 would sell for more like $80,000, with brokers taking a commission on the $80,000 sell price. Why doesn't the market bid that price up?
In most states, the price of a tax credit is dependent on a few things: the protection afforded to the buyer of the tax credits, which is provided for in the program legislation; the supply of and demand for credits (Econ 101); and the attributes of the credit, like carry forward, types of taxes that can be offset and percentage of tax that can be offset. And then there is the basic "transactional cost" of time and money spent internally to get the deal done. If the price is too high, or the volume is too low, the larger buyers pass on the deal. There's a fair bit of effort that goes into being a party to this type of transaction. That is built into the market's pricing. If you were a buyer and could only save $1,000 on taxes by putting in all that effort, it just wouldn't be worth it.
I know some folks have tried to create online exchanges for tax credits. Firms like TheOIX.com, eTaxCreditExchange.com, and BaxiExchange.com have gotten some press, but it doesn't seem to have taken off. Why is that?
At the end of the day, this is a people business. You get the best results by working with people you know and trust. We practice complete transparency and navigate the legal process, which is what parties to these transactions demand. Automation is great but unless there's a track record of getting results, it won't take off on its own. Right now, the market is doing just fine as it is. There's not much that automation can add that will change the results in a materially beneficial way. I don't think those entrepreneurs truly realized that this was the case.
That makes sense. By the way, there's a lot of opposition in the marketplace to tax credits, with some referring to it as corporate welfare. How do you respond to that?
Governments have to compete to get business and they need tools to motivate behaviors. That's all this is about. In my experience, the positive impact from these projects far outweighs the costs of the incentives. You really have to look at it from a big picture perspective. If you look at it myopically, sure, you might not see the larger benefits to the communities. The best example is film: For years, $10 billion a year in US production went overseas to access incentives. Now with our incentives, studios are again spending that money locally when making a movie. They hire local actors, caterers, builders, costume designers, stay in local hotels, use the dry cleaners, technical folks, etc. The credit is awarded and utilized years after that money goes into the local economy. The tax credits bring studios back, again and again, and the local businesses supporting these studios grow. It's the purest form of sustainable economic stimulus, provided the programs are carefully crafted. These are not subsidy programs, they are programs intended to create economic activity. And they do.
I completely agree with that. So, where do you see this market heading in the future?
Tax credits stimulate investment….into research and development, cleaning up environmental waste, historic rehab, or filming. This has been proven and I don't think tax credits will go away. Transferability is key, so I think our industry will continue to grow. However, markets will tighten and the survivors in the industry will have to do more than just match buyers and sellers. Also, adhering to highest ethical standards, developing long term relationships with buyers, sellers and states, and always looking at where the market is going, are key to surviving as a Placement Specialist. Tax Credits, LLC intends to maintain our position as one of the bigger players in this space going forward.
Fantastic. We wish you all the best going forward, and thanks for educating us on this very interesting tax credits marketplace.
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