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Federal $1.5 Trillion Tax Plan Affects Economic Development Grants

By Colin McEvoy on December 22, 2017

The U.S. Congress has approved a $1.5 trillion tax plan that includes a little-mentioned revision eliminating the tax-exempt status of economic development grants.

The U.S. Congress has approved a $1.5 trillion tax plan that includes a little-mentioned revision eliminating the tax-exempt status of economic development grants.

A little-mentioned revision in the $1.5 trillion tax plan approved by the U.S. Congress this week has eliminated the tax-exempt status of economic development grants and could have a nationwide impact on state and local economic development initiatives and programs.

The tax bill takes away the federal tax exemption for state and local monetary or land awards intended to incentivize or entice development into a particular location.

Under the bill, the change doesn’t apply to existing awards or programs that are under a master development plan, which appears to exempt existing initiatives underway in the Lehigh Valley, like Allentown’s Neighborhood Improvement Zone (NIZ), Bethlehem’s City Revitalization & Improvement Zone (CRIZ), or existing Tax Increment Financing (TIF) districts.

While the $1.5 trillion tax bill has received extensive media coverage and analysis, there has been little to no mention of the provision that makes economic development grants subject to federal taxes. As a result, some ambiguity remains as to how the new tax bill language will be interpreted. At first blush, regional officials do not believe it will have a drastic effect on the Lehigh Valley economy or local incentive programs.

“These changes will apply to every state and local government across the country, so it’s a level playing field that doesn’t create state-based winners or losers,” said Don Cunningham, President & CEO of the Lehigh Valley Economic Development Corporation (LVEDC). “It will certainly diminish the effect of economic development awards across-the-board and will give a greater advantage to programs and districts already in place where benefits will remain tax free.”

Prior to the tax bill changes, grants and incremental financing programs were treated as contribution to capital and are not taxable income. The new language will treat them as taxable income for the recipient.

That means revenue from an incentive zone that would previously have gone back to a developer to pay off building loans for a project may now be subject to federal taxes, unless they are part of an existing “master development plan,” according to the bill. But the NIZ in Allentown and the CRIZ in Bethlehem are already part of master development plans and will not be affected by the changes, according to Pennsylvania Sen. Pat Browne.

“In advancing this change of long standing federal tax policy, congressional members were sensitive to its potential negative impact on current private/public efforts to revitalize challenged communities,” said Browne, chairman of the Senate Appropriations Committee. “I am confident the inclusion of our recommended exception for master development plans will protect existing redevelopment programs in Allentown and Bethlehem and other parallel efforts throughout the nation to re-energize struggling urban centers.”

Likewise, tax abatement programs like Local Economic Revitalization Tax Assistance (LERTA) and Keystone Opportunity Zones (KOZs) will also be exempt from taxes, according to Joseph Uliana of J.M. Uliana & Associates.

Cunningham said does not expect these changes to negatively impact the Lehigh Valley economy. Indirectly, the change is likely to have a greater effect on states or regions that rely extensively on cash and land incentives to entice development.

“One of the realities of Pennsylvania having budget problems the last several years is that fewer and smaller economic incentive grants have been awarded,” Cunningham said. “There are many states, particularly in the southern U.S., that give very generous economic development incentives to lure companies. They will now have to decide how comfortable they are with sending a good portion of their state or local tax dollars to the federal government as part of the process.”

The change is new and the language is likely to require significant interpretation.

“LVEDC is working to make sure we understand how this is going to being interpreted and implemented, and that we communicate that to our development stakeholders in the Lehigh Valley,” Cunningham said.

Jane Spradlin, CPA, a shareholder with Concannon Miller, said this change in the tax bill is one of several that still require codification by the Internal Revenue Service (IRS).

“The IRS treasury regulations to support this bill will likely define a ‘qualifying master development plan,” Spradlin said.

The NIZ is a 128-acre zone that includes portions of downtown Allentown and the Riverfront district along the western side of the Lehigh River. All taxes generated in the NIZ, with the exception of school district and city taxes, can be used to pay debt service on any financed improvements within the NIZ.

That district, which recently won the Urban Land Institute’s 2017-18 Global Award of Excellence, has helped spur an economic renaissance in downtown Allentown, which includes the PPL Center hockey arena and more than $400 million in investment from the City Center Investment Corp.

The CRIZ consists of 130 acres of parcels designated for economic development and job creation within the city of Bethlehem. State and local taxes collected within the CRIZ will be used to repay debt service to stimulate economic development projects within the zone.

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