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April 7, 2014
Camp's Tax Reform Would Add Pressure on States
by Jennifer DePaul

Full Text Published by Tax Analysts®

Tucked away in the 979-page tax reform proposal of House Ways and Means Committee member Dave Camp, R-Mich., is a provision that would repeal a federal tax benefit that businesses receive from state and local governments for moving or expanding operations to their jurisdiction.

The provision, included in section 3101 of Camp's draft bill, would repeal code section 118, under which contributions to capital are not included in gross income, and create a new section 76 to revise the treatment of contributions to capital. Contributions to capital include transfers of money or property to a company by a non-shareholder, which may be a government.

Under the proposal, "a contribution to capital, other than a contribution of money or property made in exchange for stock of a corporation or any interest in an entity, is included in gross income of a taxpayer," the Joint Committee on Taxation explained in its description (JCX-14-14) of the bill.

For example, the JCT explained, if a municipality contributed land to a corporation and did not receive stock in exchange, it would be considered a contribution to capital and therefore would be included in the corporation's gross income.

"It's potentially a big deal for states that use things like cheap or free land to encourage economic development," said Howard Gleckman of the Urban Institute. "This is a very common practice to get a business to move to your state."

Gleckman said that the move on Camp's part to discourage that type of activity "levels the playing field" for all businesses, because under proposal, they would have to "pay tax on the deal no matter where it comes from." He also maintained that the proposal "wouldn't disadvantage one jurisdiction over another."

Repeal of section 118 would generate $8.8 billion in federal revenue over 10 years, according to a JCT estimate (JCX-20-14).

Several tax law experts said that repeal of the subsidy could have a significant impact on states and ultimately force them to restructure their incentives packages.

"While at first it seems to be an obscure tax provision, it has applicability across a large sector of the economy," said Andrea Macintosh Whiteway of McDermott Will & Emery. "Repealing section 118 would have a significant, adverse impact at least on the real estate sector."

Whiteway, Gleckman, and Madison J. Barnett of Sutherland Asbill & Brennan LLP all said that repeal of section 118 could affect the way states structure their incentives programs.

"It could shift the types of incentives away from those that would be taxable toward those that would not," said Barnett. "There would be pressure from states to increase the gross dollars or incentives on what they are giving out. If one state does one thing, there is pressure for others to follow."

One example of an alternative incentive from a state or local government to a corporation would be a loan, but that isn't as attractive as a nontaxable contribution, Whiteway said.

Whiteway also noted that there appears to be a movement afoot in Congress for the federal government to limit the amount of subsidies for state and local operations, corresponding to Camp's proposal to repeal the deduction for state and local income taxes.

"They are looking at it from the mindset that when we [Congress] provide a subsidy that can be implemented unevenly among the states, it is somehow problematic," Whiteway said.

A spokesperson from Camp's office could not be reached for comment.

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