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Tax Credits in President Obama’s FY 2012 Budget

President Obama’s proposed budget for Fiscal Year 2012 has a number of interesting tax credit proposals.

Research and Development Credit

On page 37 of the President’s Budget Message (216 page PDF), there is a proposal to extend and expand the Research and Experimentation tax credit:

Simplify, Expand, and Make Permanent the Research and Experimentation (R&E) Tax Credit.

The R&E tax credit is a powerful incentive for private firms to make investments in the research and development necessary to keep a pipeline of new and improved products coming to market, which is critical to economic growth and job creation. Yet the United States currently ranks 24th out of 38 countries in the generosity of our R&E tax incentives. That’s why, as part of corporate tax reform, the President supports making the R&E tax credit permanent to give businesses the certainty they need to make these important investments. In addition, the Administration wants to expand the credit by about 20 percent, the largest increase in the credit’s history, and simplify it so that it is easier for firms to take this credit and make the investments our economy needs to compete

Additional details are provided on page 14 of the Treasury Department document “General Explanations of the Administrations Fiscal Year 2012 Revenue Proposals” (159 page PDF). The bottom line proposal is to make the credit permanent and to increase the rate of the alternative simplified credit from 14 to 17 percent.

Empowerment Zones and Renewal Communities

The Budget document proposes replacing the Empowerment Zone program with a new geographically targeted incentive program called “Growth Zones.” More information is provided on page 570 of the Budget Appendix (1364 page PDF):

No new appropriation is requested for the Empowerment Zone (EZ) and Renewal Community (RC) programs in the 2012 Budget. The EZs’ tax incentives were extended through December 31, 2011, while the tax incentives for RCs expired on December 31, 2009.

The Budget includes a proposal for a new national competition to identify 20 growth zones (likely 14 urban zones and 6 rural zones) across the country. Growth Zones are designed to build on the success of Empowerment Zones, and will provide streamlined support to distressed communities. These zones will receive flexible grants for planning, seed capital, technical assistance, or other costs through the Economic Development Administration (EDA), as well as federal program flexibility, and two tax incentives: an employment incentive and an investment incentive. The competitive application process will reward communities that face distress and show promise for growth. The Department of Housing and Urban Development (HUD) will partner with EDA to help select urban zones, and HUD will also provide technical support to make the zones successful.

According to HUD there are currently 30 Empowerment Zones and there were 40 Renewal Communities, so this new Growth Zone represents a significant downsizing of federal geographic zone incentives.

The Treasury Dept. document (pages 25-29) provides some additional technical details: The new Growth Zones would be designated for only four years, Jan. 1, 2012 through Dec. 31, 2016, and

Two tax incentives would be applicable to growth zones. First, an employment credit would be provided to businesses that employ zone residents. The credit would apply to the first $15,000 of qualifying zone employee wages. The credit rate would be 20 percent for zone residents who are employed within the zone and 10 percent for zone residents employed outside of the zone. The definition of a qualified zone employee would follow rules found in section 1396(d). For the purposes of the 10 percent credit, the requirement that substantially all of the services performed by the employee for the employer are within the zone would not apply. The definition of qualified zone wages would follow the definitions provided in section 1396(c) and 1397(a).

Second, qualified property placed in service within the zone would be eligible for additional first-year depreciation of 100 percent of the adjusted basis of the property.

A significant change from EMP Zones and RCs here is the ability of employers outside the geography of the zone to receive tax credits for employees who reside in the zones.

The Work Opportunity Tax Credit (WOTC) is currently scheduled to expire on December 31, 2011, the proposed budget would extend the provision another year Dec. 31, 2012. (See page 32 and page 150 of the Treasury Dept. document).

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