Corporations, state agencies, and the management of state corporate income tax incentives

Abstract

One of the most popular and controversial economic development strategies in state government is the availability of statutory provisions that allow corporations to reduce their tax obligations when they invest in various business development activities. The popularity of those so-called statutory-tax incentives is based, in part, on widely-held assumptions that greatly limit the expected role of management and organizations in their implementation. The purpose of this study is to examine the influence of management and organization on the implementation of statutory tax incentives. This study is based on models of administrative behavior in classic organization theory and proposes that statutory-tax incentives often do not function according to their rational designs because of corporate and governmental administrator pursuit of various organizational and subunit objectives and their resistance to policy features that require a change in established administrative practices.

This study uses multiple sources to examine whether organizations and management affect the implementation of statutory-tax incentives. The results are primarily based on interviews with eighteen corporate managers and six governmental administrators who manage various elements of statutory-tax incentive programs. The interview results are supplemented, where appropriate, with an analysis of corporate tax return data and various governmental reports and documents.

In contrast to the popular perception of tax incentives, this study finds that management and organizations matter in the implementation of tax incentives. Tax incentive benefits rarely play a substantive role in corporate cost-benefit analysis prior to investment decisions. Instead, corporate managers claim tax incentives in response to the salience of their corporate tax liability. In addition, corporate managers are as likely to be influenced by the costs of tax incentive programs as the projected benefits.

State administrators affect tax incentives through their influence on program procedures, rules, compliance auditing, and information. Some tax incentive programs are complicated to administer and state managers must cooperate across multiple functional subunits in order to solve problems and improve program design. Their actions, however, are likely to influence the number of corporations that claim tax incentives but are not likely to improve the connection between corporate investment decisions and their consideration of tax incentives.