New U.S. exchange targets online trading of state tax credits

Fri Nov 16, 2012 6:59am EST

* $5 billion in annual transferable state tax credits

* New online market seeks to add transparency, value

* Past attempts have failed, some credits under scrutiny

By Nanette Byrnes

Nov 16 (Reuters) - A new online exchange in New Orleans allows participants to trade transferable state tax credits, an estimated $5-billion annual market that has been generating more complaints about the costs of taxpayer-backed incentives that aim to attract targeted industries to states.

Up and running for just four weeks, the Online Incentives Exchange (OIX) has traded more than $1 million in Louisiana tax credits. It hopes to offer credits from 45 states by the end of 2013, according to management.

OIX Chief Executive Danny Bigel, a former Wall Street financier and film producer, said his market will popularize and enhance the value of transferable credits -- an informal market historically dominated by small local brokers.

He said OIX will review credits for legitimacy before putting them up for sale.

"In this large universe of state tax credits there was no such thing as transparency. It was completely inefficient, a complete mystery," Bigel told Reuters in an interview.

OIX - trading film credits, digital media credits, general and historic real estate credits - has more than 60 member firms, including major film studios, wealth management firms, public and private companies, and accounting firms, he said.

More critics are complaining about rising costs of the tax credits state governments offer to attract and encourage certain industries such as clean energy or film production.

Companies get credits based on spending in a state on eligible activities. They can apply the credits to reduce corporate income taxes or other taxes. Recipients of transferable credits can sell unused portions.

Past attempts to make a national market in resalable tax credits have struggled to generate volume, with standardization a problem, said Michael Bernier, a partner with Ernst & Young's national tax practice. He analyzes credits for tax clients.

Robin Delmer, a traditional tax credit broker in Atlanta, said an online brokerage has potential, but local networks like his, built over many years, have an edge. When it comes to taxes, being locally known and trusted is an advantage, he said.

MOVIE CREDITS EYED

The Louisiana Budget Project, a private financial watchdog group, raised questions in an August 2012 report about whether the state is getting adequate return on transferable film credits. In fiscal 2012, film credits cost Louisiana $231 million, a 29 percent increase over the prior year.

The Louisiana legislature has created a Revenue Study Commission to review the film credit, along with hundreds of other state tax code exceptions. A report is due in February.

Colorado overhauled the review process for tax credits granted to donors of land for conservation after an investigation over whether appraisers were nflating land values.

Issuance of transferable tax credits is growing again after slowing during the recession. States use them in hopes of boosting economic development.

Oklahoma's transferable tax breaks for zero emission energy producers like wind farms came back in June after being phased out. This year, Georgia made its land conservation credit transferable for the first time.

Buyers of transferable credits traditionally have been large multi-state companies, often financial firms or insurers. In some markets, individual taxpayers have become involved.

Atlanta CPA Alex Knight, a tax partner with Atlanta CPA firm Habif, Arogeti & Wynne, has advised wealthy clients on using credits, including film credits, to reduce Georgia tax bills. Minimizing state taxes with credits has become a "powerful tax planning technique," for wealthy individual taxpayers, he said.

SOLD AT DISCOUNT

Credits are typically purchased for less than face value. Large companies such as Walt Disney Co and Sony often will guarantee their credits are good, helping them to get 85 cents on the dollar or more for their credits.

Less well-known companies get around 70 cents on the dollar, with more complex credits more heavily discounted, experts said.

Start-up companies can resell unused credits, said Alan Wilson, CEO of Atlanta-based gaming company Tripwire Interactive, which has video game hits like "Killing Floor."

Tripwire has received enough credits from the state of Georgia to write off its entire state tax bill every year since its launch in 2006, and still have extra credits left over for resale. Sold at 82 cents on the dollar, Tripwire tax credits will account for about 10 percent of the private company's revenues this year, Wilson said.