Incentives are financial inducements that are applied by governments all around the world to attract and retain businesses within their jurisdictions. Generally speaking, incentives are used to attract companies to an area to stimulate the economy, create high-paying jobs and boost tax revenues. Although there are obviously vast differences in the actual detail of incentives, it’s true to say that there are really three main economic models. They are:
Direct financial incentives offer companies assistance in the form of cash grants, loans, bonds, equity financing and training subsidies. They may include revolving loan funds, seed capital funds, venture funds or other programs to supplement traditional financing available through banks and public lending authorities.
Indirect financial assistance typically takes the form of state grants or loans to local governments and community organizations to support business development. Some programs tie funds to specific projects. Others may make funds available to meet more general business community needs such as infrastructure improvements or workforce training.
Tax-based incentives or rewards involve a reduction or abatement in taxes paid to the state or local government. Tax incentives usually involve foregone revenues. Around the world, the four most common tax incentives are:
• Credit Programs
In industries other than the Film Industry, tax credit incentives usually enable businesses to reduce their taxes if they meet certain performance criteria. Criteria include creating a specified number of jobs, providing worker training or investing in technological improvements or research and development.
Abatement incentives provide tax reductions to encourage capital investment.
Exemptions remove the tax liability for certain business activities – most frequently to income, sales and use, and other excise taxes.
Geographic-based incentives are usually targeted towards uplifting distressed areas through job creation.