Tax Analysts Blog

Cash for Credits: The World of Transferable Tax Credits

Posted on Jul 5, 2016

I once got an email from Angie’s List with the subject line “$99 for $200 Credit Toward Plumbing Services.” I could pay $99 to receive a $200 credit that I could use for a variety of plumbing services.  Not a bad deal. It occurred to me that transferable tax credits could be marketed in a similar fashion. Recently, Tesla Motors Inc. could have sent out a comparable  email captioned  “$19 million for $20.4 million Credit Toward State Tax Liability.”  The Tesla deal isn’t quite as good as the plumbing service example, but transferable tax credits provide tangible benefits to both sellers and purchasers.

Tesla sold approximately $20 million in Nevada tax credits to the MGM Grand Las Vegas Hotel and Casino. Tesla had “earned” the credits under its $1.3 billion deal with Nevada for building its -Gigafactory in the state. According to local reports, the MGM Grand purchased the credits for gambling license fees. 

This type of transaction is becoming commonplace as part of the states’ continuing  efforts to get taxpayers to locate and invest within their borders. The concept of a transferable tax credit came about after taxpayers received tax credits but were unable to fully use them. To keep the credits as attractive as possible, states permitted the transfer of the credits to another taxpayer. Transferability may be accomplished by several means, including sale of the credits, or by the state offering a refund or allowing for carryback.

Taxpayers purchasing transferable tax credits don’t pay face value for them. Several factors, including the type of credit and the type of taxes the credit can offset, determine the price, but in general taxpayers are paying $0.67 to $0.95 per dollar of credit purchased. There are tax credit brokers that will assist with matching sellers and buyers and an online incentive exchange (“OIX”) to help facilitate the transactions.

The sale of transferable tax credits has been contentious. Some would argue that in Nevada, the credit was given to provide incentives to Tesla and not the MGM Grand, but if we’re handing out credits, does it really matter who is claiming the benefit? Tesla suggested the state was in no worse of a position even though its credits have shifted to the gambling industry. “Tesla only receives these incentives if it performs,” the company said in a statement. “They are tied to Tesla generating an estimated $100 billion of positive economic impact for Nevada and spending a minimum of $3.5 billion.” In other words, Tesla maintains that it is upholding its end of the deal by delivering on its promised investment.

The advantage of transferable tax credits is that they remain a benefit to the taxpayer even if the taxpayer has a low tax liability. In that respect, they are particularly valuable and a good marketing tool for states. Of course, the disadvantage is that a business can receive tax credits for activity the state might not otherwise try to benefit from.

For now, Tesla has an additional $20 million in cash – cash it just might need.  

 

Read Comments (1)

Mike55Jul 6, 2016

I'm a fan of using transferrable credits as a delivery vehicle for incentives. It strikes me that the downside (i.e., a small windfall for the credit purchaser) is more than offset by the upside (i.e., simplicity, transparency and effectiveness).

In a way it's good that people are getting riled up by the Tesla/MGM deal, because it implies they are aware of it and understand what's happening. This is the polar opposite of what happens with supposedly non-transferrable incentives, where people generally don't have visibility into the end result and, even if they do, don't really understand it (for example: the partnership flip structures sometimes used to bring "tax equity" into green energy deals can be difficult for even experienced tax pros to comprehend).

So ultimately people will get mad about the Tesla/MGM deal, but so it goes, that's the deal with democracy. At least voters in Nevada can see what they're paying for the plant and decide for themselves whether it's a good deal.

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